Asia n Insights SparX

Hong Kong Property & Retail Sector Refer to important disclosures at the end of this report

DBS Group Research . Equity 17 July 2018 Bridge of tourists HSI: 28.316

 New mega infrastructure creates better links with ANALYST Jeff YAU CFA, +852 2820 4912;  Higher tourist visitation a boost to retail & hotel sectors [email protected]

 Top picks: Wharf REIC (1997), Luk Fook (590) & Sa Sa (178) Mavis HUI +852 2863 8879; [email protected] New mega infrastructure creates better links with China. The Ian CHUI +852 2971 1915; soon-to-be-commissioned Express Rail Link (XRL) & HK-- [email protected] Bridge (HZMB) will result in better transportation connectivity Jason LAM +852 29711773 between HK & Mainland China. We estimate XRL could bring in 3m [email protected] additional Mainland tourists p.a. from 2019, lifting tourist arrival numbers by a decent 7% CAGR for 2017-20. But we should not Top picks underestimate HZMB’s medium-term potential after the Tuen Mun- Closing 12-m Link & SKYCITY come onstream by 2020. In the longer T ick er Mk t Cap Price tgt Px Recom run, prosperity of the Greater Bay Area could raise mobility within the HK$bn (HKD) (HKD) region and increase its GDP (+9% CAGR to US$4.6tn by 2030) and Property spending power, hence further supporting the positive prospects. Far East Consortium 35 HK 10 4.52 5.53 BUY 14 HK 44 42.4 51.15 BUY Increased tourist visitation: a boost to retail and hotel sectors. Langham Hospitality 1270 HK 7 3.17 3.68 BUY Riding on flourishing inbound tourism, the HK retail and hotel Regal REIT 1881 HK 7 2.3 2.61 BUY sectors should run on a multi-year uptrend. Better retail sales could Wharf REIC 1997 HK 171 56.45 65.4 BUY beef up turnover rents and strengthen retail reversionary growth. Hotels should also be able to raise room rates further, pushing up Consumer the Revenue per available room (RevPAR) by 8-10% a year during Chow Sang Sang 116 HK 10.18 14.82 20.65 BUY 2018-19, in our view. Chow Tai Fook 1929 HK 85.60 8.34 n.a. NR Lifestyle 1212 HK 26.60 16.70 18.72 BUY Stock recommendations. Major HK-based retailers like Chow Tai Luk Fook 509 HK 18.99 31.65 40.75 BUY Fook, Luk Fook, Chow Sang Sang and Sa Sa, and department store Sa Sa 178 HK 14.59 4.53 6.51 BUY operator Lifestyle will outperform their peers to capture sound sales Source: DBS Bank (Hong Kong) Limited (“DBS HK”) growth. They should benefit even more from better operating Note: Prices used as of 6 July 2018 leverage ahead, given at least c.50% of their HK/Macau revenue comes from PRC tourist consumption. With a strong retail footprint in & , Wharf REIC & Hysan Development also stand to benefit from the booming retail market. In the hotel sector, Langham Hospitality Investments and Regal REIT are our preferred pure Hong Kong plays. Far East Consortium also offers investors a good exposure to the three-to-four-star hotel market.

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Asian Insights SparX Hong Kong Property & Retail Sector

The DBS Asian Insights SparX report is a deep dive look into thematic angles impacting the longer term investment thesis for a sector, country or the region. We view this as an ongoing conversation rather than a one off treatise on the topic, and invite feedback from our readers, and in particular welcome follow on questions worthy of closer examination. Table of Contents

Investment summary 3 New infrastructure to link Hong Kong and China 4 Inbound tourism – from strength to strength 10 Retail market recovery gaining momentum 11 Hotel boom underway 16 Retailers 19 Retail landlords 20 Hotel plays 21 Appendix 22 HK retail sales 22 PRC tourist data 24 Greater Bay Area 25 Stock Profiles 34 Far East Consortium 34 Hysan Development 34 Langham Hospitality Investments 34 Regal REIT 34 Wharf REIT 34 Chow Sang Sang 34 Chow Tai Fook 34 Lifestyle International 34 Luk Fook Holdings 34 Sa Sa 34

Note: Prices used as of 6 July 2018

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Asian Insights SparX Hong Kong Property & Retail Sector

Investment summary

Forthcoming mega infrastructure projects to link up Hong Since Hong Kong’s hotel and retail industry are highly Kong with Mainland China. With the forthcoming dependent on Mainland tourists, improving the accessibility of commissioning of the Express Rail Link (XRL) and Hong Kong- Mainland tourists into Hong Kong via XRL and HZMB should Zhuhai-Macau Bridge (HZMB), Hong Kong will become better give the recovering retail and hotel sectors an additional push. connected with Mainland China than ever before, thus linking Hong Kong to a brighter future. Top brand retailers selling luxuries and cosmetics to also take the lead. In view of at least 20-30% higher price points in Express Rail Link shortens travelling time, pointing to better Mainland China mainly attributable to taxes, PRC tourists save connectivity. Targeted for commissioning in the third quarter of more when buying premium global brands and jewelleries & 2018, the 26-kilometre XRL will link up Hong Kong with watches in HK/Macau that are within close proximity. , Guangzhou, and the high-speed railway network in Cosmetics have also been their favourite merchandises Mainland China. The travelling time between Hong Kong and considering their affordable average ticket sizes to suit major cities in China will be considerably shorter. everyone. Hence, these categories will benefit the most along with a rising number of Mainland visitors, as already seen in Better than air travel for those within six hour travelling radius their strong contribution of c.50% or higher HK/Macau sales in by train. The benefits of using the XRL diminishes for Mainland these segments. To best play on the tourist boom, we like travellers when travel distance increases. We believe the XRL prominent HK-based operators, including Chow Tai Fook, Luk would primarily attract those residing within a six-hour Fook and Chow Sang Sang in jewelleries & watches; Sa Sa in travelling radius by high-speed train due to time and cost cosmetics; as well as Lifestyle’s department stores that mainly savings. Residents in Wuhan and Xiamen are cases in point. On focus on luxuries & cosmetics. Most of these retailers are the other hand, travelling to Hong Kong by air remains more trading at an undemanding valuation, offering about 15-30%+ time and cost efficient for those residing in Shanghai and upside on a 12-month horizon. Beijing. Wharf REIC and Hysan Development emerge as prime Additional 3 million tourists per annum. We estimate that XRL beneficiaries of the retail market boom. Retail plays, especially would bring in an additional three million Mainland tourists per those selling expensive luxury items and cosmetics, should annum from 2019, made up of both day-trippers and continue to see better retail sales growth. This should translate overnight visitors. This represents c.5% of total tourist arrivals. into higher turnover rent, immediately followed by stronger retail reversionary growth in the years ahead. These factors Appeal to business travellers and middle income class. A mega- should drive the earnings growth for major retail landlords sized office project is planned to be built above the West including Wharf REIC and Hysan Development. Wharf REIC is Terminus of the XRL. Coupled with easy accessibility trading at 26% discount to our assessed current net asset to Central, the XRL should hold strong appeal to business value (NAV) while Hysan Development is trading 44% below travellers from China. Besides, the high-speed train should our estimated current NAV. Despite these shares’ become the preferred mode of transportation among frequent outperformance year-to-date (YTD), there is scope for further individual travellers, mainly the middle income class and leisure share price appreciation in the year ahead with retail sector travellers, commuting between Mainland China and Hong expected to go from strength to strength. Kong. Langham Hospitality Investments, Regal REIT, and Far East Hong Kong-Zhuhai-Macau Bridge to be preferred transport Consortium to tap growing demand for hotel accommodation. mode between and Macau/Zhuhai. The HZMB Revenue per available room (RevPAR) of Hong Kong hotels is expected to come onstream in the second half of 2018, should remain on an upward trajectory in the foreseeable greatly improving the connectivity between Hong Kong and future. Far East Consortium, Langham Hospitality Investments, the western Delta. In particular, the HZMB will be and Regal REIT should benefit from this favourable sector trend the preferred transportation mode to commute between New in our view. Overall, Langham Hospitality Investments and Territories and Macau/Zhuhai. Regal REIT are each currently offering distribution yields of >6% for FY18-19. These stocks are BUYs with respective TPs of Enormous long-term potential to be unlocked. Between these HK$3.68 and HK$2.61. Far East Consortium is trading >60% two infrastructure projects, the XRL should give a stronger below our appraised current NAV. In addition to a recovery in boost to Hong Kong’s inbound tourism initially. But long-term, hotel earnings in Hong Kong, its overseas business expansion the potential of the HZMB should not be overlooked especially will also play a crucial role in dictating its share price when the Tuen Mun-Chek Lap Kok Link and SKYCITY becomes performance. Maintain BUY with TP of HK$5.55 operational.

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Asian Insights SparX Hong Kong Property & Retail Sector

New infrastructure to link Hong Kong and China Map of China’s High-Speed Rail network

The Express Rail Link to be commissioned soon. Serving as the final phase of the Guangzhou-Shenzhen-Hong Kong Express Rail Link, the 26-km long Hong Kong Section of the Express Rail Link (XRL) is an underground high-speed railway line running from West Kowloon Terminus to Shenzhen Futian, which is then linked with the Guangshen Beijing (Guangzhou and Shenzhen) section that has been

inaugurated in phases since 2011. Z hengzhou Xi'an (7 hrs) (9 hrs) Nanjing (8 hrs)

Construction works for the XRL commenced in Jan 2010. Wuhan Shanghai Chengdu (5 hrs) Hangzhou (8 hrs) The project was 98.6% completed as of Dec 2017. It is (12 hrs) (7 hrs) Changsha (4 hrs) Chongqing targeted to open in 3Q18 with trial operations commenced Nanchang (11.5 hrs) (4.5 hrs) F uzhou in 2Q18. (5 hrs) Kunming Xiamen (6.5 hrs) (3.5 hrs) Nanning Guangzhou (4 hrs) Shantou The XRL is funded by the Hong Kong SAR Government, Hong Kong (2.5 hrs) while MTR Corporation (MTRC) is entrusted for the design and construction of the XRL. MTRC will also be appointed as the operator of the XRL under a service concession Source: DBS HK agreement upon completion of construction.

China’s High-Speed Rail development targets The legislation of co-location arrangement was recently enacted by the legislative council of the HKSAR. The co- location arrangement will maximise the service convenience Length of HSR (km) for passengers and enables the line to realise the full 30,000 transport, economic, and social benefits. 25,000

Due to several difficulties encountered since construction on 20,000 the project commenced, the estimated project cost was revised up to HK$84.42bn from the original budget of 15,000 HK$65bn with project completion delayed to 3Q18. The 10,000 government agreed to finance the project up to the revised estimated cost of HK$84.42bn with further cost overruns to 5,000 be borne by MTRC. As a result of cost overruns, the overall expected Economic Internal Rate of Return (EIRR) of the XRL 0 2017A 2018E project has reduced from c.6% to c.4% according to the Total HSR length HKSAR Government estimates made in 2015.

Source: , DBS HK The high-speed cross boundary XRL will connect Hong Kong to Shenzhen, Guangzhou and then to the National High- speed Railway (HSR) Network in China. The HSR network Pursuant to a Memorandum of Understanding signed has been rapidly expanding over the past decade. It started between HKSAR Government and China Railways from only one HSR line (Beijing-Tianjin intercity railway) in Corporation in Jan 2018, XRL will operate using 127 train 2008 connecting the two major cities with a total length of pairs on a daily basis in the early stages of service c.120km, and has progressed towards the formation of a commencement. Of this, 114 train pairs will provide short- national high-speed rail grid that comprises of eight high- haul services between West Kowloon Terminus and speed rail corridors (four between north and south and four Futian/Guangzhou South station as detailed in the table on between east and west) with a total length of c.25,000km the next page. Fares are expected to lie between HK$80 and by end-2017. In 2018, China will extend the total HSR HK$260. The remaining 13 pairs are direct long-haul trains length by 3,500km to c.28,500km with targets to achieve to cities including Xiamen, Wuhan, Hangzhou, Shanghai, 30,000km (covering c.80% of large cities) and 38,000km by and Beijing. 2020 and 2025 respectively.

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Estimated travelling times between Hong Kong and Expected ticket fare China cities (Short-haul services)

Time of travel (mins) Expected ticket fare (HK$) 60 300 50 250 40 200 30 150 20 100 10 50

0 0 Futian Shenzhen Guangzhou Futian Shenzhen Humen Guangzhou North South North South

Source: HKSAR Government, DBS HK Source: HKSAR Government, DBS HK

Estimated travelling times between Hong Kong and Planned daily train pairs China cities (Long-haul services)

Daily train pairs (pairs) Time of travel (mins) 90 600 80 500 70 400 60 300 50 200 40 100 30 0

20

Beijing

Wuhan Fuzhou

10 Xiamen

Shanghai

Changsha

Nanhcang Hangzhou 0 Zhengzhou

Humen Guangzhou Futian Shenzhen Shantou South North Station) (Chaoshan Source: HKSAR Government, DBS HK Source: HKSAR Government, DBS HK

Reduced transportation time. It is clear that the XRL will Primary attraction of Chinese visitors from within the 6 hour shorten the travelling time between Hong Kong and travelling radius. Our analysis suggests that the cost and Mainland China. Based on the estimates from the HKSAR time benefits by travelling on the XRL diminishes as the Government, the XRL could save an aggregate of c.39m distance increases. When distance increase, it is not only hours of travelling time on an annual basis. For example, the time required for travelling with the XRL that increases but travelling time between Hong Kong to Shenzhen (Futian) also the corresponding cost rises dramatically and could and Guangzhou will be shortened to 14 minutes and 48 exceed that of air travel. As shown in the table below, travel minutes respectively. It takes 4 hours to travel to Hong Kong to Hong Kong from Beijing and Shanghai compares from Xiamen and 7 hours 45 minutes from Shanghai. This unfavourably with air travel in terms of time and cost. On makes it easier for Mainland travellers to pay a visit to Hong the other hand, those residing in Wuhan and Xiamen would Kong or vice versa. find it more time and cost effective to travel to Hong Kong by XRL. All factors considered, we believe the launch of XRL would primarily help to attract more visitors residing within the 6-hour travelling radius by high-speed train such as Wuhan, Xiamen and other nearby cities.

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Asian Insights SparX Hong Kong Property & Retail Sector

Comparison between travel by air and HSR Breakdown of cross-border travellers (after XRL is operational) Travelling time to HK v ia train v ia air Fee (train) F ee (air) (Central): (hours) (hours) HK$ (HK$) Cross- Beijing CBD (China World boundary Trade Centre in Chaoyang Cross- 10.25 10.00 1,383.58 933.46 ferry district) boundary coach 4% Shanghai (Shanghai IFC) 9.75 9.00 1,337.90 1,078.35 37% Wuhan (Wuhan Centre) 6.50 7.75 930.49 1,108.77 HKXRL 5.42 7.08 541.60 809.38 Xiamen (Zhong Shan Road) 15% Source: DBS HK

The XRL project is expected to bring in a meaningful Boundary number of additional Mainland tourists, both day-trippers Through train train and overnight visitors, to Hong Kong. The HKSAR 43% 1% Government estimates the daily ridership of XRL to reach c.109,200 upon commencement of services in third quarter 2018, gradually increasing to 119,200 by 2021 and 149,800 Source: HKSAR Government, DBS HK by 2031. About 49% of such commuters are expected to be non-Hong Kong residents including business travellers (18%) and non-business travellers (31%). Assuming 1) an Better connectivity with Mainland China. To conclude, equal split between inbound and outbound travellers, and leveraging on the connection to China’s rapidly expanding 2) 30% of inbound travellers are additional travellers carried HSR network, the forthcoming XRL will open up a new by the XRL, our calculation shows that the XRL will bring in alternative to travel between Hong Kong and Mainland an additional 0.76m, 3.02m and 3.11m of Mainland visitors China, strengthening the accessibility of Hong Kong among in 2018, 2019 and 2020 respectively. These represent 1.3%, those visitors in other cities outside of . 5.2% and 5.3% of total visitors in 2017. Appeals to business travellers… . The XRL is served by West Breakdown of ridership of XRL Kowloon Terminus which is one of largest high speed train stations around the globe with usable floor area of 4.3 million square feet. West Kowloon Terminus is in downtown Non HK Hong Kong. It is adjacent to Kowloon Station above which non- business the renowned International Commerce Centre (ICC) and 31% HK Elements (a luxury shopping mall) are located. Hong Kong Business Station is just one stop away from Kowloon Station. It is in 18% core Central, Hong Kong’s main business district. Non-HK Business 18% Moreover, a commercial project standing above West Kowloon Terminus will be up for tender in the next nine months. This mega sized development will offer total gross HK non- business floor area (GFA) of 3.16 million square feet, primarily for 33% office use. We believe that this strategically located office development will become an attractive alternative choice for office users in Central when completed in 2025. With easy

accessibility to key business areas, the XRL should hold Source: HKSAR Government, DBS HK strong appeal to business travellers from Mainland China.

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Asian Insights SparX Hong Kong Property & Retail Sector

… and also middle class leisure travellers. We also expect Map of Hong Kong Zhuhai Macau Bridge the high-speed train to be a preferred mode of transport among frequent individual travellers commuting between Mainland China and Hong Kong, who are usually from the middle income class and leisure travellers. They would have travelled to Hong Kong before. In addition to shopping, they would also like to explore and experience this city in their own way when visiting Hong Kong again. Over time, we expect more Mainland tourists to travel to Hong Kong individually instead of in group tours. The commissioning of the XRL offers travellers more flexibility when planning trips to Hong Kong. With improved connectivity following the opening of the XRL, we expect more individual travellers (from Mainland China) making frequent visits to Hong Kong particularly over long weekends or holidays. Source: HK Highways Department

Express Rail terminus in West Kowloon Population of cities in the Western

8000 7000 6000 5000 4000 3000 2000

1000 Population'000persons 0

Source: DBS HK Source: CEIC

Hong Kong-Zhuhai-Macau Bridge (HZMB) The HZMB consists of a main bridge and link roads which

connect to boundary crossing facilities at each of the three The Hong Kong-Zhuhai-Macau Bridge (HZMB) links up Hong territories. Construction of the main bridge commenced Kong, Zhuhai, and Macau. This mega infrastructure project back in late 2009. The HZMB is anticipated to be will greatly improve the connectivity between Hong Kong commissioned later this year. and Western Pearl River Delta (population: >32 million). It should play a crucial role in the Great Bay Area initiative. The main bridge is a dual 3-lane carriageway which spans a

23km suspension bridge and a 6.7km subsea tunnel. On the eastern end of the HZMB, a boundary crossing facility is being constructed on an artificial island immediately east of the airport and two highways, the Hong Kong Link Road (HKLR, 12km) and the Tuen Mun Chek Lap Kok Link (TM- CLKL, 9km). The HKLR connects the Hong Kong boundary crossing facility to the main bridge. The TM-CLKL connects Tuen Mun, the boundary crossing facility, and North .

Currently, motor vehicles travelling from Hong Kong to Zhuhai and Western Guangdong province have no choice but to travel north and take a 200-km detour via the Humen

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Bridge. The HZMB is expected to reduce travel time and Hong Kong-Zhuhai-Macau Bridge to be preferred transport distance between Hong Kong and Zhuhai by up to 60% to mode between New Territories and Macau/Zhuhai The ferry 80%. We expect this improvement in connectivity to drive ride usually takes around 60 to 75 minutes depending on an increase in both passenger and freight traffic between sea and weather conditions. The capacity of the ferries Hong Kong and cities in the Western Pearl River Delta. range from 180 to >400 passengers, depending on the vessel. The ferries to and from and Macau Travelling distance/time between Hong Kong & Zhuhai depart every 15 minutes from 7am to midnight with fewer frequent sailings from midnight till 7am. Both Shun Tak and Current V ia HZ MB Sav ings Water Jet have additional sailings during peak hours. Origin Destination Distance T rav el Distance T rav el Distance/Travel Basic fares for each leg of the trip ranges from HK$160 (k m) T ime (k m) T ime T ime Kwai Chung Zhuhai > 200km 3.5hr 65km 75min >60% (Macau to HK) to HK$170 (HK to Macau). Fares for shuttle Container Port HK bus services between cross boundary facilities is HK$80. If HK International Zhuhai > 200km 4hr 40km 45min >80% we take into account transportation costs needed to get to cross boundary facilities, the overall cost should be similar Airport for taking ferry and bus rides Source: DBS HK For residents, the ferry is still the most

convenient transportation option to Macau even with the According to a feasibility study conducted in 2008, traffic HZMB. For those residents in the New Territories, the HZMB flow for the HZMB is estimated at 9,200-14,000 vehicles per is expected to save up to 30 minutes of travelling time. day initially. The government has not provided any updates to this projection. Assuming daily traffic flow of 8,400 vehicles in 2019, daily

ridership is estimated at 38,300. Assuming 51% of such For the long-term traffic flow forecast, the consultants commuters are non-Hong Kong residents and an equal split forecast that 29,100 vehicles and 42,000 vehicles will use between inbound and outbound travellers with 30% of the HZMB per day by 2030 and 2037 respectively. This inbound tourists being additional travellers carried by the translates into respective passenger flows of 126,000 and HZMB, our analysis suggests that the HZMB should bring in 175,000 per day. additional inbound tourists of 1.07m in 2019, rising to

1.12m in 2020 and 1.22m in 2021. Overall, in comparison After the opening of the HZMB, there will be a 24-hour bus to the XRL, we expect the HZMB to initially bring in fewer service covering the cross boundary facilities. It will be tourists to Hong Kong. served by 120 buses. Travelling time is about 40 minutes. It is estimated that the maximum daily ridership could reach Enormous long-term potential to be unlocked. However, the 96,000. In response to high demand, the Mainland and long-term benefits of HZMB are expected to gradually flow Hong Kong authorities increased the quota for Mainland- in when the TM-CLKL and SKYCITY come onstream starting Hong Kong cross boundary private cars (dual license plates) from 2021. by 7,000 to 10,000 in Dec-17.

The Tuen Mun-Chek Lap Kok Link Road (TM-CLKL) Currently, the high-speed ferry service is the most popular The Tuen Mun-Chek Lap Kok Link Road (TM-CLKL) is a 9km transport mode for passengers commuting between Hong highway which connects Tuen Mun and North Lantau Kong and Macau/Zhuhai. According to the Hong Kong Island. The TM-CLKL has a 5km subsea tunnel northern Marine Department, there were 36 catamarans and 11 section and a 4km bridge/viaduct southern section. Using jetfoil vessels operating between Hong Kong and Macau in existing roads, residents of Tuen Mun and western New 2017. Territories have to travel >30km to the airport. The new TM-

CLKL will cut the distance by up to 22km. The main operators are TurboJET, owned by Shun Tak

(242.HK), and , owned by Sands China Upon completion in 2020 at the earliest, the north-western (1928.HK). There are two main high-speed ferry terminals in New Territories should benefit from increased tourist flow. Hong Kong - Shun Tak Centre in and China This augurs well for hotels such as Hong Kong Gold Coast Hong Kong City in Tsim Sha Tsui. Smaller piers include Hotel and shopping centres like V. City and Tuen Mun Town , which is directly connected to the Hong Kong Plaza in the area. International Airport, and Tuen Mun Ferry Terminal. In

2017, 12.5m passengers arrived in Hong Kong and 14.8m Moreover, feasibility studies for the 9km Tuen Mun Western passengers departed from Hong Kong via these ferry Bypass (TMWB) linking the Shenzhen Bay Bridge in the terminals.: north and the TM-CLKL in the south began in Oct 2017.

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Tuen Mun-Chek Lap Kok Link Road (TM-CLKL) The Airport Authority has gradually been awarding the development rights of various land sites to private developers in accordance with the development schedule of the entire project.

In Feb 2017, Regal Hotels international was awarded the development rights for a new hotel at SKYCITY by the Airport Authority for a consideration payable in form of a non-refundable rental payment of HK$2.189 bn. The estimated total investment cost is close to HK$5bn. The hotel project is the first phase of the SKYCITY integrated development..

With a site area of 71,580 square feet, this hotel project has Source: HK Highways Department permissible gross floor area of 362,750 square feet. Regal Hotels plans to develop a 13-storey 1,203 room hotel with SKYCITY – a new destination for both locals and tourists. extensive banquet, meeting and food and beverage Proposed by the Hong Kong Airport Authority, SKYCITY, facilities. Branded as Regala Skycity Hotel held under a sub- which was first announced in 2016, is Hong Kong’s major lease from the Airport Authority, it will operate as a full integrated development with retail complexes, dining and service hotel targeting commercial, airline related, leisure entertainment facilities, hotels and offices. This project will and meeting businesses. The foundation works has be developed in phases. Sitting on approximately 25 commenced with project completion targeted for 2020. hectares of land, SKYCITY is in close proximity with the passenger terminals of the Hong Kong International Airport In May 2018, New World Development was awarded the on one hand and cross boundary facilities of the HZMB on rights to develop and manage the commercial development the other. Upon the commissioning of the HZMB and TM- at SKYCITY near the HKIA at Chek Lap Kok. This commercial CLKL, the strategically located SKYCITY will see major site is located at Site A2 and A3 of SKYCITY. Scheduled for improvements in transportation connections. This new completion in phases from 2023-27, this development will destination should attract substantial interest from local comprise retail, dining and entertainment facilities with a residents particularly those in the western New Territories, maximum gross floor area of 3.77m square feet. The Airport as well as Mainland Chinese visitors, especially those from Authority will grant a lease to New World Development on the Greater Bay Area. this commercial development for a term up to Sep 2066. Pursuant to the agreement, New World Development will SKYCITY pay the Airport Authority the higher of a guaranteed rent or revenue rent that represents 20% of gross revenue derived from the project (with subsequent adjustment to 30%) throughout the lease term. The total investment cost is estimated at c.HK$20bn.

Source: HK Airport Authority

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Inbound tourism – from strength to For the full year of 2018, we project that the total number strength of visitor arrivals will grow 7.6% to 62.9m, mainly driven by Chinese tourists. Overnight visitors and day-trippers from Inbound tourism recovery, starting from early 2017, has China are forecast to rise 7.4% and 11.8% respectively, continued to gather momentum in 2018. Total visitor which takes into account the opening of XRL and HZMB. arrivals grew 9.6% to 25.9m in Jan-May 2018 (5M18), led The long haul market should remain broadly stable. by Mainland Chinese tourists. The number of Mainland tourists rose 12.7% to 20.1m, representing 78% of total Due the full-year effect of XRL and HZMB, we estimate visitors. Overnight visitors and same day travelers from 11.5% growth in Mainland tourists in 2019. This should in Mainland China grew 8.9% and 15.2% respectively. The turn lead to another 9.1% rise in overall tourist arrivals. short haul market registered a 1.7% fall in tourist arrivals, Overall, we project total visitor arrivals to post 3-year CAGR dragged by Taiwan and Southeast Asia. Among short haul of 6.8% in 2017-20, with the corresponding growth of markets, Japanese visitors showed 5.3% growth while those 8.4% and 4.9% for day-trippers and overnight visitors. The from South Korea fell marginally increase would be primairly driven by Mainland Chinese visitors. We forecast overnight visitors and day-trippers from Visitors from long haul markets grew modestly by 3.2% in China to rise at a 3-year CAGR of 6.7% and 9.9% 5M18. In particular, tourists from the US/Canada grew respectively. The corresponding growth for day-trippers 5.4%. should be higher due to the completion of HZMB which would enhance the connectivity between Hong Kong and Visitor arrivals growth – overall Great Bay Area.

Total visitor arrivals Yoy, % May-18: 8% y-o-y 50 5M18: 9.6% y-o-y 40 30 80 20 70 10 60 0 50 (10) 40 (20)

(30) persons) (m 30

20

Jul/08 Jul/09 Jul/10 Jul/11 Jul/12 Jul/13 Jul/14 Jul/15 Jul/16 Jul/17

Jan/17 Jan/08 Jan/09 Jan/10 Jan/11 Jan/12 Jan/13 Jan/14 Jan/15 Jan/16 Jan/18

10 Source: HK Tourism Board, CEIC 0 2014 2015 2016 2017 2018F 2019F 2020F 2021F

Visitor arrivals growth – China Source: DBS HK

Yoy, % 10.6% y-o-y May-18: 60 5M18: 12.7% y-o-y 50 40 30 20 10 0 (10) (20) (30)

(40)

Jul/08 Jul/09 Jul/10 Jul/11 Jul/12 Jul/13 Jul/14 Jul/15 Jul/16 Jul/17

Jan/08 Jan/10 Jan/11 Jan/12 Jan/13 Jan/14 Jan/15 Jan/16 Jan/17 Jan/18 Jan/09

Source: HK Tourism Board, CEIC

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Retail market recovery gaining Our channel checks also pointed to strong same-store sales momentum growth (SSSG) in the first half of 2018 across key retailers in HK. Luxury watch retailers including Emperor Watch and HK retail sales continued to log sequential improvements Oriental Watch achieved >30% SSSG. Major department and achieved a strong growth of 13.7% year-on-year (y-o-y) store operator, Lifestyle, also achieved double-digit SSSG for during Jan-May 2018. Specifically, categories well-liked by its flagship SOGO Store in Causeway Bay given strong Mainland tourists scored the best performance, including efforts in product-mix refinement (2017 SSSG: +4.3%). In jewellery & watches (+22.8%), and cosmetics & medicines addition, Sa Sa scored c.20% SSSG, inclusive of a robust (+17.4%). Such robust growth was predominantly driven by 25.3% SSSG in the second quarter. Leading jewellery increasing sales volume, as Mainland tourist arrival numbers retailers like Chow Tai Fook, Luk Fook and Chow Sang Sang also grew strongly by 12.9% to 20m visitors during the all posted SSSG in the teens during the first half of 2018. period, versus a mere 3.9% growth in 2017. Moreover, key global luxury brands like Prada were estimated to have recorded >10% SSSG during the period. HK total retail sales by value & volume (% change y-o-y) Estimated SSSG in HK/Macau in first six months 2018 (% change y-o-y) 20% 16% 55% 45% 12% 35% 8% 25% 4% 15% 0% 5%

-4%

Jul-17

Jun-17

Oct-17

Sep-17 Apr-18

Dec-17

Nov-17

Mar-18

Aug-17 May-18

May-17 -5%

Sa Sa Sa

Prada

Luk Fook Luk

Jan-Feb 2018* Jan-Feb CWB)

Total Retail sales (value) Total Retail sales (volume)

Chow Tai Fook Tai Chow

Oriental Watch Oriental

Emperor Watch Emperor Lifestyle (SOGO, Lifestyle

Sang Sang Chow 2017 1H18E *Jan-Feb data were combined to avoid seasonality impacts from the Chinese New Year. Note: all data are from channel checks and estimates, and had been Source: Census & Statistics Dept. adjusted to calendar-year basis

Source: DBS HK HK retail sales by category, Jan-May 18 (% change y-o-y)

Mainland tourists are crucial

22.8%

22% 18.8%

17.7% Local demand YTD remains supportive, on the back of a

17.4%

13.9% 13.7%

17% 13.0% stable economy and the increase in purchasing power of the

12.2% 11.8%

12% 10.1% middle class after salary tax cuts in the 2017/18 tax year.

7.2% 4.0%

7% 1.4% More importantly, continuous improvement in tourist arrival

- 1.5% 2% numbers has helped to boost retail sales growth in HK. As -3% HK/Macau are tax-free shopping paradises with close proximity to China, Mainland visitors consistently contribute

Total to a significant portion of retail revenue in both cities. Some examples to highlight include Prada which is estimated to

capture c.70% of its HK/Macau sales from Chinese tourists. Supermarkets

tobacco Sa Sa, Lifestyle’s SOGO Store (Tsim Sha Tsui), as well as Luk

products Department stores Department

valuable gifts valuable Fook also captured 69%, c.60% and 58% of their Medicines & cosmetics & Medicines

Food, alcoholic drinks & drinks alcoholic Food, respective HK/Macau sales from Mainland visitors.

Clothing, footwear & allied & footwear Clothing, Jewellery, watches, clocks & clocks watches, Jewellery,

Sales value Sales volume

Source: Census & Statistics Dept

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Asian Insights SparX Hong Kong Property & Retail Sector

Sales contribution from Mainland tourists in HK/Macau Last year, Mainland tourist spending in HK reached (FY17) HK$189bn in total, out of which HK$131bn (69%) was spent on shopping, HK$21bn (10.9%) on hotel bills, HK$20bn (10.8%) on restaurants, and the remainder on Lifestyle (SOGO, CWB) c.40% miscellaneous items. Specifically, as much as 88% of Chow Sang Sang 44% spending by day visitors was for the purchase of merchandise compared to 60% for overnight visitors. Given Chow Tai Fook # 45% that the proportion of same-day visitors is on an upward trend, hitting 61.3% of total Chinese tourists in Jan-May Luk Fook # 58% 2018 (2017: 58.3% of total), coupled with expectations of a faster increase in same-day Chinese travellers visiting HK as Lifestyle (SOGO, TST) c.60% transport links with China improves (e.g. high-speed rail, Sa Sa # 69% HK-Zhuhai-Macau Bridge, etc.), we see very good prospects in the outlook of some leading retailers in HK/Macau. This is Prada c.70% particularly the case for those offering popular product categories amongst Chinese tourists, such as cosmetics, 0% 20% 40% 60% 80% jewelleries, high-end watches, and major global brands.

# FY17 = 12 months ended Mar 2018 Chinese visitor spending in HK (2017) Note: Mainly based on sales transactions settled by China UnionPay, Alipay, WeChat Pay or RMB 11.86% Source: DBS HK 31.01% 39.78%

A good correlation between sales of discretionary products and Mainland visitor numbers also reinstates the importance of tourist consumption in HK. Taking Sa Sa as an example 88.14% (demonstrated in the chart below), the close relationship is 68.99% especially seen when we trace performance trends between 60.22% changes in tourist numbers in HK and Sa Sa’s sales transactions over the years. A much higher average ticket / basket size from Mainland tourists (>HK$600) versus Sa Sa’s local consumers (>HK$200) further highlights the Same-day Overnight All significance of Chinese tourists in driving sales momentum Shopping Non-shopping of HK/Macau retailers. Source: CEIC

Sa Sa: sales volume vs. Mainland tourists to HK/Macau Chinese tourists to HK (% of overnight visitors vs. same- day) 20% 15% 70% 10% 60% 5% 50% 0% 40% -5% 30% -10% -15% 20% -20% 10%

0%

2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18

PRC tourist arrivals in HK (%y-o-y)

Jul-17

Jan-17 Jan-18

Sep-17

Nov-17

Mar-17 Mar-18 May-18 Sa Sa: No. of transactions (%y-o-y) May-17 Sa Sa: Average basket size (%y-o-y) % Overnight % Same-day

Source: HK Tourism Board, Company, DBS HK Source: CEIC

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Asian Insights SparX Hong Kong Property & Retail Sector

HK: the biggest beneficiary Chinese Visitor Breakdown by Transportation in 2017

Among the major preferred destinations of Mainland By Air travellers, including domestic tourism within China as well 12% as outbound travelling to popular tourist destinations like Japan, South Korea and Singapore, HK pulls in the highest By Sea value of Mainland tourist shopping receipts as a proportion 4% of total retail sales. This ratio reached 29.3% last year, which was way above that from other regions and should expand further.

2017 Mainland tourists’ shopping receipts (as % of retail sales)

35% By Land 29.3% 84% 30%

25% Source: CEIC

20% Last year, as many as 5bn domestic tourists travelled within 15% China, versus merely 131m Chinese tourists that travelled out of the country. As such, improving transport 10% connections between HK/Macau and China could potentially 5% 2.8% redirect some of the domestic travellers into these two 1.6% 1.5% 0.6% cities, especially HK that is the preferred spot among the top 0% outbound destinations of Mainland Chinese. Hong Singapore South China Japan Kong Korea Taking the new High-Speed Rail as an example, passengers could shorten their travel time from various PRC cities upon Source: CEIC its inauguration, especially across the Southern China Province. This should then create better opportunities to unlock and channel some of the Chinese inbound tourist Diverting inbound Mainland tourists to HK/Macau receipts, which amounted to over US$700bn in 2017, into HK/Macau. So far, a majority of Mainland tourists arrive in HK via trains, Total spending by Chinese domestic tourists (US$bn) buses, charter shuttles or private cars. In 2017, 84% of all Chinese visitors come to HK by land, 12% by air, and 4% by sea. As travelling by land is relatively more affordable, 800 713.0 especially for those based in Southern China, improving 700 infrastructure including HZMB and XRL should offer more 615.1 options for Mainland visitors to come to HK and Macau. 600 534.0

500 473.5

400

300

200

100

0 2014 2015 2016 2017 Source: CEIC

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Asian Insights SparX Hong Kong Property & Retail Sector

China's total number of outbound tourists (m) Despite a swift recovery in the retail market, high-street 9% CAGR shops generally recorded much lower rents upon lease 450 (2017-30F) renewals or re-lettings, as the rentals are substantially lower 400.0 400 now than a few years ago.

350 High street shop rental growth (core areas, accumulative) 300 250 16% CAGR (2000-17) 200 150 130.5 100

50 10.3 0 2000 2017 2030F

Source: CEIC, Chinese Outbound Tourism Research Institute

Top destinations of China’s inbound / outbound tourists

Inbound tourists Outbound tourists Source: CBRE Research, 4Q17 1 Beijing 1 Hong Kong

2 Shanghai 2 Bangkok While rentals across street-level stores in the major shopping 3 Chengdu 3 Phuket districts of HK had corrected for three consecutive years, we 4 Chongqing 4 Tokyo still expect some rent cuts to take place on lease renewals in 2018. Based on a normal 3-year term, this year, retailers are 5 Xiamen 5 Bali seeking to re-negotiate for shop rentals that were anchored 6 Hangzhou 6 Singapore since 2015, which are still generally much higher than the 7 Guangzhou 7 Macau current market level. Besides, among key retail chains that 8 Xian 8 Chiang Mai we have talked to, most of them are looking for at least a single-digit to 10%+ rental cut upon lease renewals for 9 Sanya 9 Seoul street-level stores this year, and are well-prepared to 10 Qingdao 10 Osaka relocate if landlords refuse to reduce their rentals. 11 Nanjing 11 Taipei 12 Dali 12 Nha Trang Against this backdrop, we should be able to see retailers’ posting lower rental expenses for 2018 despite some recent 13 Lijiang 13 Kyoto signs of higher asking rents. In the next 2-3 years, even if 14 Suzhou 14 Sabah the HK retail market rebounds further from rising Mainland tourist consumption, we expect rental hikes to merely have 15 Tianjin 15 Kuala Lumpur a small impact on operating costs. Better sales momentum Source: Global Independent Travel Report 2017 along with rising shoppers’ traffic should also enhance operating leverage and safeguard profitability of key Currency fluctuation could potentially be a swing factor on retailers. the retail market growth and is among the key things to watch for. Recently, the Rmb resumed its depreciation trend against the HK dollar, and this may weigh on the cross border spending by Mainland tourists.

All considered, we forecast total retail sales values to rise c.10% in 2018, after allowing for the slightly higher comparison base starting from second half 2017, followed by c.8% in 2019. The growth should be mainly supported by improving tourist spending and local consumption on discretionary items.

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Asian Insights SparX Hong Kong Property & Retail Sector

Prime shopping malls are faring much better than high street shops. Landmark malls such as and recorded single-digit rental reversions. Suburban mall operator Fortune REIT achieved 10-15% rental growth on renewal. Link REIT has fared better with reversionary growth of >25%.

That said, some leases expiring this year were renewed before the retail sales rebound was evident. Hence reversionary growth could be largely neutral or even negative if retail landlords had already re-let space to new trades or tenants.

While retail reversionary growth appears mixed in 2018, a swift retail market recovery should inevitably give landlords more pricing power in future lease negotiations with tenants. To put it another way, this augurs well for reversionary growth in the years ahead. That said, any rental hikes to merely cast a laggard impact on operating costs of retailers. Better sales momentum along with rising shoppers’ traffic should also enhance operating leverage and safeguard profitability of key retailers.

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Asian Insights SparX Hong Kong Property & Retail Sector

Hotel boom underway Hotel occupancy -overall

Supported by 6% growth in overnight visitors, the overall (%) hotel occupancy increased 3 percentage points (ppts) to 100 91% in 5M18. The improvement was across the board. High Tariff A hotels (five star-rated equivalent) saw their 95 occupancy rates rise by 5ppts to 89%. Occupancies of Medium Tariff hotels and High tariff B hotels grew 4ppts 90 and 2ppts to 92% and 91% respectively. This was despite 85 increased supply of hotel rooms. 80 Overnight visitor arrival growth per annum - overall 75 YOY%

25% 70

Jul

Jan

Jun

Oct Feb

Apr Sep

Dec

Nov

Mar

Aug May 20% 2016 2017 2018

15% Source: HK Tourism Board, CEIC

10% Hotel occupancy – High Tariff A 5%

0% (%)

95

2008 2009 2011 2012 2013 2014 2015 2016 2017 2010 -5% 5M18 90 -10%

85 Source: HK Tourism Board, CEIC

80 Overnight visitor arrival growth per annum - China 75 YOY%

25% 70

Jul

Jan

Jun

Feb Oct

Apr Sep

Dec

Nov

Mar

Aug May 20% 2016 2017 2018

15% Source: HK Tourism Board, CEIC

10%

5%

0%

2008 2009 2011 2012 2013 2014 2015 2016 2017 2010 -5% 5M18

-10%

Source: HK Tourism Board, CEIC

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Asian Insights SparX Hong Kong Property & Retail Sector

Hotel occupancy – High Tariff B Breakdown of hotel rooms – May 2018

Unclassified (%) High Tariff 7% A 100 24% 95

90 Med Tariff 31% 85

80

75

70

High Tariff B

Jul

Jan

Jun

Feb Oct

Apr Sep

Dec

Nov

Mar Aug May 38%

2016 2017 2018 Source: HK Tourism Board

Source: HK Tourism Board, CEIC The hotel room rates continued on its recovery path with Hotel occupancy – Medium Tariff improving momentum. In Jan-May 2018, overall hotel room rates grew 7.9% to HK$1,359, compared to 3.2% in fourth quarter 2017. Medium tariff hotels continued to lead the (%) market with 14.3% growth in room rates in the same 100 period. High Tariff hotels are catching up. High Tariff B hotels showed 11.7% increase in room rate during the 95 same period which compares favourably with 6.4% in 90 fourth quarter 2017. Room rates of High Tariff A hotels grew modestly by 4% in Jan-May 2018, reversing the 85 downtrend since 2015.

80 Hotel room rate - overall

75 HK$/night

70 1600

Jul

Jan

Jun

Feb Oct

Apr Sep

Dec

Nov

Mar Aug May 1500 2016 2017 2018 1400

Source: HK Tourism Board, CEIC 1300

1200 As of May 2018, there were 284 hotels with 79,321 guest 1100 rooms, up 2.3% from a year earlier. High Tariff A and B hotels accounted for 23.9% and 38.1% respectively. The 1000 balance came primarily from Medium Tariff hotels. Between 900

2017 and 2020, we project that total hotel room supply to

Jul

Jan

Jun

Oct

Feb

Apr Sep

Dec

Nov

Mar Aug increase at 3-year CAGR of 3.9%. Given the buoyant May commerical property valuations, a growing number of well- 2016 2017 2018 located three or four star rated hotels are being or will be redeveloped into commercial properties to maximise the site Source: HK Tourism Board, CEIC value. J Plus is a case in point. A local investor bought this hotel from CSI Properties in early 2017 which is now being demolished for commercial redevelopment. This could potential dilute hotel room growth.

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Asian Insights SparX Hong Kong Property & Retail Sector

Hotel room rate growth - overall Hotel room rate growth – Medium Tariff

(YOY%) (YOY%) 15% 25% 10% 5% 15% 0% 5% -5% -5% -10% -15% -15%

-20% -25%

Jul-15 Jul-16 Jul-17 Jul-14

Jul-14 Jul-15 Jul-16 Jul-17

Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

ARR: All Hotels ARR: Med Tariff

Source: HK Tourism Board, CEIC Source: HK Tourism Board, CEIC

Hotel room rate growth – High Tariff A With higher occupancies on one hand and increased room rates on the other, the overall Revenue per available room (YOY%) (RevPAR) rose 11.6% primarily led by increased room rates 15% in Jan-May 2018. Medium Tariff hotels recorded a stronger 10% RevPAR increase of 19.5% followed by High Tariff B hotels 5% (+14.2%) and High Tariff A hotels (+10.2%).

0% Hotel RevPAR (Jan-May 2018) -5% -10% (%) -15% 25 -20%

20

Jul-15 Jul-16 Jul-17 Jul-14

Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

ARR: HTA 15 Source: HK Tourism Board, CEIC 10

Hotel room rate growth – High Tariff B 5

(YOY%) 0 20% High Tariff A High Tariff B Med Tariff 15% 10% Source: HK Tourism Board, CEIC, DBS HK 5% 0% -5% Based on our projection of the growth of overnight visitors -10% and hotel room supply, we estimate the overall hotel -15% occupancy will stand at c.91% on average in 2018-20. -20% Given consistently high occupancy rates expected, there -25% should be upward pressure on room rates as well as RevPAR

in future years. We forecast the overall RevPAR to grow 8-

Jul-15 Jul-16 Jul-17 Jul-14

Jan-15 Jan-16 Jan-17 Jan-18 Jan-14 10% in each of 2018 and 2019. ARR: HTB

Source: HK Tourism Board, CEIC

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Asian Insights SparX Hong Kong Property & Retail Sector

Retailers

Better operating leverage matters Chow Tai Fook: operating cost changes (ppt. y-o-y)

Riding on sequential SSSG improvement across key retailers ppt. based in HK, together with their stringent costs control, 0.2 0.1 operating cost ratios have come down firmly along with a 0 better operating leverage. Notably, major retailers who had recently reported sound top-line growth had been able to -0.2 -0.1 dilute their overheads, reducing operating costs (in terms of -0.2 sales) and achieving better overall profitability. -0.4 -0.6 As illustrated in the following charts, upon significant SSSG rebound, both Sa Sa (HK/Macau only) and Chow Tai Fook were -0.8 able to achieve a substantial drop in rental cost ratio (in terms -1 -0.9 of sales) of 1.6ppt in 2H FY18 and 0.9ppt in FY18, respectively. Rentals Staff costs Sa Sa’s advertising & promotional (A&P) expenses also fell by FY17 (SSSG: -12.4% in HK/Macau; -5.2% in China) 0.3ppt in 2H FY18, while Chow Tai Fook’s staff costs declined by 0.2ppt in FY18. Hence, both companies were able to FY18 (SSSG: +10.2% in HK/Macau; +8% in China) register a good increase in their profitability: Sa Sa scored 1.2ppt expansion in net margin to 9.3% in 2H FY18 (1H FY18: FY17 / FY18 = 12 months ended Mar 2017 / Mar 2018 down 0.6ppt to 5%). Chow Tai Fook also achieved 0.9ppt Source: Company increase in net margin to 6.9% in FY18 (FY17: +0.8ppt), despite 1.3ppt decline in gross margin due to changing product-mix (FY17: -0.4ppt). Overall, by expecting a higher amount of Mainland tourists visiting HK/Macau ahead, local retailers are well-poised to Sa Sa: operating cost changes (ppt. y-o-y) benefit to a good extent. Given at least 20-30% higher price points in Mainland China mainly attributable to taxes, PRC tourists could save a lot when buying goods in HK/Macau, and ppt. could continue to be attracted to visit and shop in the two 0.7 cities given their close proximity to China. 0.7 0.3 0.1 0.2 To best play on the tourist boom, we like prominent HK-based operators that offer hard luxuries, including Chow Tai Fook -0.3 -0.1 (1929), Luk Fook (590) and Chow Sang Sang (116), as they -0.3 allow Mainland customers to save more upon making -0.8 purchases under the tax-free environment. We also like Sa Sa -1.3 (178) in the cosmetics industry considering their affordable average ticket sizes that suit everyone, as well as Lifestyle -1.8 -1.6 (1212) that operates department stores focusing on luxuries & Rentals Staff costs A&P expenses cosmetics. Most of these retailers are trading at an 1H FY18 (SSSG -2.1%) 2H FY18 (SSSG +9.1%) undemanding valuation, offering about 15-30%+ upside on a 12-month horizon. FY18 = 12 months ended Mar 2018

Source: Company (HK/Macau only)

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Asian Insights SparX Hong Kong Property & Retail Sector

Retail landlords With strong property presence in Hong Kong’s traditional retail hubs of Tsim Sha Tsui and Causeway Bay, Wharf REIC and Improving tenants’ sales at landmark malls YTD, there was a Hysan Development stand to benefit from retail market boom. remarkable improvement in tenant sales across the board at landmark malls. Retail sales growth at Harbour City in Tsim Sha Key Retail Properties – Wharf REIC Tsui, Wharf REIC’s retail flagship, accelerated strongly to 37% in 1Q18, from 2017’s 9.1%, primarily led by sales of expensive GFA luxury goods. Times Square in Causeway Bay and The Mall at Key Retail Properties District ('000 sf) Pacific Place in Admiralty recorded respective tenant sales Harbour City Tsim Sha Tsui 2,068 Time Square Causeway Bay 943 growth of 23% and 25.9%, compared to 1.1% and 7.2% in Diamond Hill 562 2017. In Jan-May 2018, Hysan Development’s retail portfolio in Causeway Bay also registered 28% tenant sales growth Source: Wharf REIC (excluding Apple). Lee Gardens hub (which accommodates mainly luxury retailers) and fared better with tenant sales growth exceeding 30% in total. Tenant sales at Key Retail Properties – Hysan Development MTRC’s Elements atop Kowloon Station, which features luxury brands, also expanded by more than 20% YTD. GFA Key Retail Properties District ('000 sf) With the commissioning of the XRL and HZMB to further Hysan Place Causeway Bay 450 increase tourist visitation to Hong Kong, overall tourist Lee Gardens One Causeway Bay 192 spending is set to grow. This should support tenant sales Lee Gardens Two Causeway Bay 131 growth at key malls, particularly those targeting tourists such Lee Gardens Three Causeway Bay 100 as Harbour City. This is despite a higher comparison base. Plaza Causeway Bay 315

Source: Hysan Turnover rents to jump. Rebounding tenant sales would translate into higher turnover rents, which could make up 10- 20% of retail rental income. This would benefit the retail YTD, retail landlords staged strong share price performance. landlords immediately. Share prices of Wharf REIC and Hysan Development rose 9% and 1%, outperforming the broad market and most of Hong Better reversionary growth ahead. The better the tenants sales, Kong property counters. Yet, we still see room for further the stronger is the landlords’ ability to raise the rents during share price appreciation in the year ahead given improving lease renewals. Meanwhile, the retail reversionary growth retail market prospects. remains mixed. However, with retail sales growth momentum sustainable, we expect retail landlords to see better reversionary growth outlook in the year ahead. We expect landmark shopping malls to register double digit rental reversion in 2019.

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Asian Insights SparX Hong Kong Property & Retail Sector

Hotel plays Hotel portfolio – Far East Consortium Regal REIT boasts a balanced portfolio of nine hotels with a Properties District Num. of Rooms total of 4,909 rooms, representing c.6% of total inventory in Dorsett Kwun Tong Kwun Tong 361 Hong Kong. They are branded under “ Regal” and “iclub” Dorsett Tsuen Wan Tsuen Wan 547 which target different market segments. This enables Regal Silka Far East Tsuen Wan 240 REIT to cater for the need of different travellers. Aided by the Cosmo Hotel HK Wanchai 142 revival of overnight visitor arrivals, Regal REIT’s hotel RevPAR Dorsett Mongkok Mongkok 285 rose >10% in Jan-Apr 2018. This should support revenue Lain Kwai Fong Hotel Central 162 growth. Silka Seaview Yau Ma Tei 268 Silka Tsuen Wan Tsuen Wan 409 With a portfolio of three quality hotels on the Kowloon Dorsett Wanchai Wanchai 454 Peninsula, Langham Hospitality Investments is tapping the T otal 2,868 growing demand for hotel accommodation led by reviving Source: Far East Consortium inbound tourism. Particularly, Langham Hospitality Investments should benefit from the return of overnight visitors from Mainland China which contributed a growing share of its total Despite the improving hotel sector outlook, shares of Langham guests in recent years. The Langham and Cordis registered Hospitality Investments, Regal REIT and Far East Consortium RevPAR growth of c.9% led by increased room rates in Jan-Apr have fallen 3-8%, in tandem with the broad market. 2018. Despite short-term business disruption, the renovation at Continued interest rate hikes cast a shadow over the Eaton should enhance its long-term competitiveness. performance of Langham Hospitality Investments and Regal REIT which are seen as bond-like investments. Far East Consortium is a key owner and operator of three-to- four star rated hotels in Hong Kong with c.2900 rooms. Three- Meanwhile, Langham Hospitality Investments and Regal REIT star rated hotels are among the first to recover with are offering distribution yields of >6% for FY18-19. New respectable RevPAR growth. This should benefit Far East infrastructure projects should increase tourist visitation to Hong Consortium the most. Kong leading to a brighter future for hotel plays. We recommend BUY with their respective TPs of HK$3.68 and Hotel portfolio- Langham Hospitality Investments HK$2.61. Far East Consortium is trading >60% below our appraised current NAV. In addition to local hotel earnings Properties District Num. of Rooms recovery, its overseas business expansion would also play a The Langham Tsim Sha Tsui 498 crucial role in its share price performance. Maintain BUY with Cordis Hotel Mong Kok 668 TP of HK$5.53. Eaton Hotel Yau Ma Tei 465

T otal 1,631 Source: Langham Hospitality Investments

Hotel portfolio – Regal REIT

Properties District Num. of Rooms Regal Hong Kong Hotel Causeway Bay 481 iclub Wan Chai Hotel Wan Chai 99 iclub Sheung Wan Hotel Sheung Wan 248 iclub Fortress Hill Hotel Fortress Hill 338 Regal Kowloon Hotel Tsim Sha Tsui 600 Regal Oriental Hotel Kowloon City 494 iclub Ma Tau Wai Hotel Kowloon City 340 Regal Riverside Hotel Sha Tin 1,138 Regal Airport Hotel Chek Lap Kok 1,171 T otal 4,909 Source: Regal REIT

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Asian Insights SparX Hong Kong Property & Retail Sector

Appendix

HK/Macau same-store sales growth (%)

30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0% -50.0%

-60.0%

1Q15 2Q15 3Q15 4Q15 1Q16 4Q17 1Q18 1Q14 2Q14 3Q14 4Q14 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17

Sa Sa Chow Sang Sang Chow Tai Fook Luk Fook

Source: DBS HK (Estimated numbers for Chow Sang Sang as the company does not report quarterly data.)

Hong Kong retail sales (monthly) Hong Kong retail sales (annual)

HKD bn % HKD bn 100,000 35 600 30% 28 24.9% 80,000 494 493 21 475 25% 500 18.3% 445 437 446 60,000 14 406 20% 400 7 15% 40,000 325 0 275 (7) 300 10% 20,000 9.8% (14) -0.2% 2.2% 5% 200 11.0% 0 (21) 0.6% -3.7% 0% 100

-8.1% -5%

Jul-11 Jul-16

Jun-12 Jun-17

Oct-13

Apr-14 Sep-14

Dec-11 Dec-16

Nov-12 Nov-17

Mar-15 Aug-15

May-13 0 -10% Jan-Feb 16 Jan-Feb Jan-Feb 11 Jan-Feb 2009 2010 2011 2012 2013 2014 2015 2016 2017 Hong Kong Retail Sales (LHS) YoY growth (RHS) Hong Kong Retail Sales (LHS) YoY growth (RHS)

Source: CEIC Source: CEIC

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Asian Insights SparX Hong Kong Property & Retail Sector

Hong Kong retail sales breakdown

Retail sales growth (YoY, %) Categories 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 5M18

Jewellery, Watches, Clocks & 50.4 43.3 11.8 3.9 32.6 13.5 (16.7) (10.2) (15.9) (15.2) (21.1) (13.2) 0.8 9.3 22.8 Valuable Gift Clothing, Footwear & Allied Products 27.8 28.2 11.5 4.1 9.8 6.8 8.1 0.1 (3.6) (10.1) (7.8) (0.9) (2.4) 3.0 13.0 Consumer Durable Goods 26.7 30.2 27.7 12.7 10.9 (3.8) (3.5) 8.6 12.3 (0.1) (24.1) (17.4) (8.9) 2.8 15.3 Department Stores 20.3 22.8 10.8 8.7 19.9 15.9 3.0 (0.2) (1.0) (7.0) (9.0) (3.4) 0.8 5.9 13.9 Other Consumer Goods 17.1 18.0 10.6 7.4 10.4 8.2 6.6 6.1 (0.8) (5.0) (2.1) 1.5 3.8 7.2 16.0 Fuels 15.1 14.4 6.0 0.9 1.5 (1.2) (0.9) (1.9) (12.5) (8.5) (1.6) 0.7 3.9 4.1 8.6 Supermarkets 10.9 13.9 12.6 8.1 7.2 6.4 6.0 3.2 1.1 1.5 1.0 0.6 (1.2) 0.7 1.5 Food, Alcoholic Drinks & Tobacco 5.8 8.6 3.1 2.6 2.4 4.5 7.1 6.1 7.9 4.0 1.2 2.2 2.4 3.9 7.2 Medicines & Cosmetics 22.3 20.8 17.0 13.1 13.2 10.6 8.4 10.2 0.9 (4.9) (1.6) 1.7 2.7 8.6 17.4

Retail Sales Value 24.4 25.3 13.1 6.8 15.0 7.1 (1.3) 0.8 (1.6) (5.8) (10.5) (5.5) (0.6) 5.0 13.7

Hong Kong retail sales breakdown (monthly)

Retail sales growth (YoY, %) 2017 2018 J an- J an- Categories F eb Mar A pr May J un J ul A ug Sep Oct Nov Dec F eb Mar A pr May Jewellery, Watches, Clocks & Valuable Gift (1.2) 8.3 0.2 1.0 (0.8) 13.3 7.4 14.8 8.5 7.8 6.2 21.2 23.8 24.5 23.8 Clothing, Footwear & Allied Products (6.6) 1.2 1.8 (0.8) (1.9) 0.5 (1.4) 1.6 6.3 3.8 6.1 19.3 11.5 6.5 7.4 Consumer Durable Goods (15.5) (1.4) (12.7) (6.2) 0.2 (0.9) 4.3 (5.3) (8.4) 14.8 12.3 24.2 4.5 15.3 8.8 Department Stores (1.7) 0.1 3.9 3.6 0.8 5.5 5.2 9.4 6.2 5.7 3.9 11.3 17.5 12.5 16.7 Other Consumer Goods 3.9 5.3 5.7 3.0 0.7 4.5 2.5 8.9 8.0 11.2 8.6 16.8 14.2 14.9 16.9 Fuels 6.4 9.1 2.9 0.6 (0.8) 1.4 3.3 6.5 8.2 4.0 1.0 4.4 5.8 10.0 17.5 Supermarkets (3.9) 2.6 (0.5) (1.3) 0.4 0.0 2.3 2.7 0.7 1.5 (2.8) 0.9 2.0 1.1 2.7 Food, Alcoholic Drinks & Tobacco 1.5 2.8 3.1 3.1 2.6 4.5 (3.9) 9.2 8.9 3.6 1.1 10.5 4.0 3.9 5.9 Medicines & Cosmetics 3.0 3.4 4.8 2.4 (0.5) 2.6 2.3 12.8 10.0 13.6 11.4 17.0 16.5 17.8 18.7

Retail Sales Value (3.2) 3.0 0.1 0.4 0.1 4.0 2.7 5.7 3.9 7.5 5.8 15.7 11.5 12.2 12.9

Source: CEIC

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Asian Insights SparX Hong Kong Property & Retail Sector

Same-day PRC visitor shopping expenditure in HK (HK$bn) Overnight PRC visitor shopping expenditure in HK (HK$bn)

119.27 70.29 68.34 109.41 98.13 59.49 91.60 53.68 52.43 78.79 82.16 78.20 45.38 64.03 32.00 23.91

2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017 Source: CEIC Source: CEIC

Total spending by PRC domestic tourists (US$bn) Per capita spending of PRC tourists (US$)

3000 87.8 2500 133.2 2000 154.8 99.4 1500 625.1 481.9 1000 374.1 379.1 500

0 2014 2015 2016 2017 Hong Kong Japan South Korea Singapore 2014 2015 2016 2017 Non-shopping Shopping

Source: CEIC Source: CEIC

Mainland Chinese visitors to HK, Japan, Singapore and South Korea (no. of person)

7

Millions 6

5

4

3

2

1

- 1/2014 4/2014 7/2014 10/2014 1/2015 4/2015 7/2015 10/2015 1/2016 4/2016 7/2016 10/2016 1/2017 4/2017 7/2017 10/2017 1/2018 Hong Kong Japan South Korea Singapore

Source: CEIC

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Asian Insights SparX Hong Kong Property & Retail Sector

Guangdong, Hong Kong, Macau: The Greater Bay Area (GBA)

The Greater Bay Area (GBA) is an initiative that altogether Along with on-going developments, the Chinese involves 11 cities. They include 9 Mainland Chinese Cities in government envisions the regional integration of these 11 the Guangdong province (i.e. Guangzhou, Shenzhen, cities, and aims to create a cluster that would leverage on Dongguan, Foshan, , , Zhaoqing, the competitive advantages of each specific city. For Zhongshan, Zhuhai), and the two Special Administrative instance, Shenzhen will take a leading role in technology Regions of Hong Kong and Macau (“9+2 cities”). and innovation; Hong Kong will continue to take leadership as an international financial center; while Macau will serve as an integrated entertainment hub.

Map of Greater Bay Area (GBA)

Source: HK Government

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Asian Insights SparX Hong Kong Property & Retail Sector

With a total population of nearly 70m, the GBA covers over Macro statistics: key economic hubs in the world (2017) 55,000 sq. km. and had an overall GDP of US$1.5tn last year. The region should eventually be comparable to, or Location Population GDP (US$ tn) GDP per capita even outshine other well-developed economic hubs in the Greater Tokyo Area 44 m 1.8 40,909 world, including the Greater Tokyo Metropolitan Area, San New York City 8.6 m 1.7 197,674 Francisco Bay Area and the New York City. San Francisco Bay 7.6 m 0.8 105,263

GBA: Population by city (2017) Greater Bay Area (GBA) 69.5 m 1.5 21,838 Source: King & Wood Mallesons, HKTDC, DSEC (mil of persons)

16.0 14.5 14.0 12.5 At the national level, the GBA also plays an important 12.0 strategic role in the One Belt One Road Initiative (OBOR). 10.0 8.3 7.7 7.4 Hong Kong, Pearl River Delta cities, and Macau are 8.0 advantageously located and have existing maritime 6.0 4.8 4.6 4.1 3.3 infrastructures in place. The GBA will serve as a stepping 4.0 1.8 2.0 0.7 stone for Chinese companies, goods and services to go 0.0 abroad. The High-speed Rail and the HZMB will be key

infrastructure projects that will directly enhance

Macau Zhuhai

Foshan transportation connectivity between Hong Kong/Macau and

Huizhou

Zhaoqing

Jiangmen Shenzhen

Dongguan the rest of the “9+2 cities”.

Zhongshan

Hong Kong Hong Guangzhou

Source: HKTDC, DSEC In terms of initial potential benefits of the GBA development, we expect improving corporate synergies in

the region and a bigger influx of talents from other parts of GBA: GDP by city (2017) China and overseas. More importantly, we should expect sound improvement in the overall mobility among residents GDP per capita Area Major cities GDP (US$bn) (US$) (sq. k m) in the GBA to further boost tourist arrival numbers in HK/Macau in the medium-term. Macau 49 75,385 29 Hong Kong 336 45,590 1,104 On the whole, the impending GBA infrastructural Shenzhen 335 26,736 1,992 improvements should significantly reduce the time required Guangzhou 321 22,153 7,434 to commute between different cities, hence we expect a Zhuhai 39 22,096 1,732 rising number of Mainlanders travelling to HK/Macau more Foshan 142 18,562 3,798 efficiently at lower transportation costs. To quote a few Zhongshan 51 15,644 1,784 Dongguan 114 13,669 2,460 examples, travelling time between Zhuhai and HK will be Huizhou 57 11,932 11,200 shortened to 30 minutes (currently: c.3 hours by land) once Jiangmen 41 8,991 9,505 the HK-Zhuhai-Macau Bridge inaugurates. Zhongshan to Zhaoqing 33 8,010 14,891 Shenzhen could also take merely 30 minutes to commute upon completion of the Shenzhen-Zhongshan Passage / T otal 1,518 21,838 55,929 Bridge. Besides, the Zhongshan- Expressway that is Source: HKTDC, DSEC currently in the planning stage could also shorten the travel time between Jiangmen and Shenzhen to 1.5 hours. The King & Wood Mallesons projects that the GBA could achieve intercity Mass Rapid Transit Railway also effectively links up a combined population of 86m (+1.6% CAGR) by 2030, various major cities including Guangzhou, Shunde, with an estimated GDP of US$4.6tn (+9% CAGR). This Zhongshan, Jiangmen, etc. could translate into a GDP per capita of over US$53,000 in 12.5 years. Overall, 78% of the bridges and intercity rails in GBA that are currently under construction should be completed by 2020 (source: HK Economic Digest). Upon completion, the GBA transport network development should help to cut down commuting time between further away Chinese cities and the Pearl River Delta Region to less than 2 hours only. All these should mean a swifter and much easier travel process for Mainlanders to visit HK/Macau ahead.

ASIAN INSIGHTS Page 26

Asian Insights SparX Hong Kong Property & Retail Sector

GBA: Transportation network extension

Hotel portfolio – Regal REIT (1881.HK) Foshan Guangzhou Dongguan (廣州) (佛山) Intercity MRT (東莞) Guangzhu Guangzhou West Line South Station Nansha New Humen Pearl River Bridge (廣珠西線) (城軌廣州南站) District 南沙新區 (虎門大橋) Shunde ( ) Intercity MRT Shenzhen 順德 Intercity MRT ( ) Shunde Station Zhongshan Shenzhen-Zhongshan (深圳) (城軌順德站) Station Passage/Bridge (深中通道inaugur) (城軌中山站) (under construction) ation Hong Kong Jiangmen Zhongshan-Kaiping Expressway Zhongshan Intercity MRT Zhongshan Port Qianhai New (香港) (江門) Nanlang Station Terminal District (中開平高速) 中山 China HK City ( ) (城軌南朗站) (中山港碼頭) (前海新區) Ferry Terminal (under planning) Intercity MRT Terminal (中港城碼頭) Cuiheng Station (九洲港碼頭) Intercity MRT HK-Macau 城軌翠亨站 Jiangmen Station ( ) Ferry Terminal (城軌江門站) Hong Kong-Zhuhai-Macau Bridge (港澳碼頭) Z huhai (港珠澳大橋) (珠海) (Expected inauguration: 2H18) Werstern Coastal Expressway 西部沿海高速 ( ) Macau Outer Harbour Ferry Terminal New (澳門) District (外港碼頭) (橫琴新區)

Note: MRT (Mass Rapid Transit)

Source: The HK Economic Digest, DBS

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Asian Insights SparX Hong Kong Property & Retail Sector

Selected major infrastructural projects in the GBA

New infrastructures Target completion Remark s Shenzhen–Zhongshan Passage / 2024 To connect two major cities of Shenzhen (towards the East) and Zhongshan (towards the wes) Bridge (original target: 2021) within the Pearl River Delta (PRD) of China. It will consist of a series of bridges and tunnels, starting from Bao'an International Airport on the Shenzhen side. The proposed 51 km eight-lane link is expected to cost around US$4.83bn. It will be located about 27 km downriver from the Humen Bridge, the only current bridge crossing of the delta, and some 32 km north of the new Hong Kong–Zhuhai–Macau Bridge that will soon commence operations, and will link the cities of Hong Kong, Zhuhai, and Macau at the southern end of the PRD. Construction started in May 2017. Guangzhou-Zhuhai Intercity Completed Also called the Guangzhu intercity railway (广珠城轨). It is a dedicated, grade-separated regional Railway railway linking Guangzhou South railway station in Panyu, Guangzhou, and Zhuhai Airport in Zhuhai, via Shunde, Zhongshan and Jiangmen, in the Guangdong province. It is the first line completed in the currently under construction Pearl River Delta (PRD) Rapid Transit network. The railway has partly started operations in January 2011. It will be divided into three parts with a total of 27 stations. Its main line between Guangzhou and Zhuhai City, via Shunde and Zhongshan, is 117 km long, with 17 stations and a maximum speed of 200 km/h (124 mph). The planned extension from Zhuhai City to Zhuhai Airport is 35.3 km long, with 7 stations and a maximum speed of 160 km/h (99 mph). Its spur line between Zhongshan and Jiangmen is 26 km long, with 6 stations and a maximum speed of 200 km/h (124 mph). When fully completed, passengers traveling on the main line between Zhuhai and Guangzhou South will have a choice between a 46-minute non-stop and a 76-minute, 140 km/h all-stop service. The non-stop service is offered between Zhuhai and Guangzhou South only, and travel between Zhuhai (Gongbei) and Zhuhai Airport will be cut down to 25 minutes. It currently takes 50 minutes to travel by automobile from Gongbei, Zhuhai to Zhuhai Airport, and 1 hour 30 minutes from Gongbei, Zhuhai to Panyu, Guangzhou. Pearl River Delta Metropolitan 2030 It is a regional high-speed rail and commuter rail network being gradually constructed in the PRD of Region Intercity Railway System China. The project's goal is to have every major urban center in the PRD to be within one-hour travel by rail to Guangzhou. On March 16, 2005, the State Council examined and approved plans for a regional high-speed commuter rail network for the Jingjinji, River Delta and the Pearl River Delta. According to the plan, by 2020, PRD MAIR network will have a total route mileage of about 600 kilometres. In September 2009, the plan was expanded to 1,478 km of routes split up into 23 lines. In the long term vision, network length will reach 1,890 km by 2030. By then the network will provide basic coverage to the PRD region. Source: Wikipedia, Economic Digest

GBA: Area by city

Z huhai F oshan Huizhou Z hongshan Dongguan J iangmen Z haoqing Shenzhen Guangzhou Hong Kong Macau Primary Sector 2% 2% 5% 2% 0% 8% 15% 0% 1% 0% 0% Secondary Sector Industrial 43% 21% 51% 50% 45% 45% 45% 37% 27% 1% 1% Construction 6% 2% 3% 2% 1% 3% 3% 3% 3% 5% 7% Other secondary activities 0% 37% 0% 0% 0% 0% 0% 0% 0% 1% 1% Tertiary Sector Transport, Storage and Postage 2% 3% 2% 2% 3% 4% 3% 3% 7% 6% 4% Wholesale & Retail 10% 7% 10% 9% 12% 8% 9% 11% 15% 22% 7% Accommodation & Restaurants 2% 1% 3% 1% 2% 1% 2% 2% 2% 3% 8% Financial sector 7% 4% 4% 6% 6% 5% 3% 14% 9% 18% 9% Real Estate 9% 8% 7% 7% 6% 6% 3% 9% 8% 11% 13% Other services 19% 15% 14% 20% 22% 19% 16% 20% 28% 32% 50% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Note: 1 HKD = 0.89558 RMB as of Dec 2016

Source: Wind, Census and Statistics Department of HKSAR, Statistics and Census Service of Government of Macao SAR

ASIAN INSIGHTS Page 28

Asian Insights SparX Hong Kong Property & Retail Sector

Far East Consortium NAV Discount Far East Consortium NAV Discount Band

% HK$ +2SD: -59% (60) 5.5 -60%-60% 5.0 -60% (65) +1SD: -63% 4.5 -66%-66% -66% Average: -67% 4.0 (70) -71% 3.5 -71% -1SD: -70% (75) 3.0 -76% 2.5 -76% -76% -2SD: -74% -82% (80) 2.0 -82% -82% 1.5

(85)

Jun-16 Jun-17 Jun-18

Oct-16 Feb-17 Oct-17 Feb-18

Apr-17 Apr-18

Dec-16 Dec-17

Aug-16 Aug-17

Jun-16 Jun-17 Jun-18

Oct-16 Oct-17

Feb-17 Feb-18

Apr-18 Apr-17

Dec-16 Dec-17 Aug-17 Aug-16

Hysan Development NAV Discount Hysan NAV Discount Band

% HK$ 0 73 -10% (10) 63 (20) +2SD: -22% -25% 53 (30) +1SD: -31% Average: -40% 43 -40% (40) 33 -54% (50) -1SD: -49% 23 -69% (60) -2SD: -58% (70) 13

(80) 3

Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-17 Jul-18 Jul-07 Jul-16

Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18

Jan-07 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-16 Jan-17 Jan-18 Jan-08 Jan-15

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-08

Wharf REIC NAV Discount Wharf REIC NAV Discount Band

% HK$ 0 120 (5) 100 (10) (15) 80 -1% (20) +2SD: -21% +1SD: -24% 60 -17% (25) Average: -27% -33% (30) -1SD: -30% 40 -50% (35) -2SD: -33% 20 -66% (40)

0

Jan-18 Jan-18

Jun-18

Feb-18

Apr-18

Dec-17

Nov-17

Mar-18 Mar-18

May-18 May-18

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-07

Source: Thomson Reuters, DBS HK

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Asian Insights SparX Hong Kong Property & Retail Sector

Langham Hospitality NAV Discount Langham Hospitality historical yield bands

HK$ HK$ 6.00 8.00 5.50 7.00 Ceiling: 4.1% 5.00 0.79x 6.00 5.00 4.50 0.7x 4.00 4.00 0.61x 3.00 3.50 Mid: 7.3% 0.52x 2.00 3.00 0.43x 1.00 2.50 Floor: 10.4% -

2.00

Nov-13 Nov-14 Nov-15 Nov-16 Nov-17

May-13 May-14 May-15 May-16 May-18 May-17

Nov/13 Nov/14 Nov/15 Nov/16 Nov/17

May/13 May/14 May/15 May/17 May/18 May/16

Regal REIT NAV Discount Regal REIT historical yield bands

HK$) HK$ 4.50 4.50 0.78x 4.00 4.00 Ceiling: 4.5% 3.50 0.65x 3.50 3.00 3.00 2.50 0.52x 2.50 2.00 1.50 0.4x 2.00 1.00 1.50 0.27x Mid: 14.4% 0.50 1.00 0.00 0.50 Floor: 24.3%

-

Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Sep-07 Sep-08 Sep-09 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-10

Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-13

Source: Thomson Reuters, DBS HK

ASIAN INSIGHTS Page 30

Asian Insights SparX Hong Kong Property & Retail Sector

Chow Sang Sang PE Band Chow Sang Sang PB Band

x x 18 2.5

16 2.0 +1SD: 13.5x 14 +1SD: 1.6x 1.5 12 Avg: 12.2x Avg: 1.3x 1.0 10

8 -1SD: 10.9x 0.5 -1SD: 1x

6 0.0

Jul-14 Jul-14

Jan-17 Jan-17

Jun-16 Jun-16

Oct-15 Oct-15

Apr-13 Sep-17 Apr-13 Sep-17

Dec-18 Dec-18

Nov-13 Nov-13

Mar-15 Mar-15 May-18 May-18 Luk Fook PE Band Luk Fook PB Band

x x 18 2.5 16 14 +1SD: 12.7x 2.0 +1SD: 1.8x 12 Avg: 10.6x Avg: 1.5x 1.5 10 8 1.0 -1SD: 1.3x 6 -1SD: 8.5x 4 0.5 2

0 0.0

Jul-14

Jan-17

Jul-14

Jun-16

Oct-15

Apr-13 Sep-17

Dec-18

Nov-13

Jan-17

Mar-15

Jun-16

Oct-15

May-18

Apr-13 Sep-17

Dec-18

Nov-13 Mar-15 May-18

SASA PE Band SASA PB Band

x x 35 12.0

+1SD: 27.9x 10.0 30 +1SD: 7.9x 8.0 Avg: 23.5x 25 Avg: 5.6x 6.0

20 4.0

-1SD: 3.4x 15 -1SD: 19x 2.0 0.0

10

Jul-14

Jan-17

Jun-16

Oct-15

Apr-13 Sep-17

Dec-18

Nov-13

Mar-15

May-18

Jul-14

Jan-17

Jun-16

Oct-15

Apr-13 Sep-17

Dec-18

Nov-13 Mar-15 May-18 Source: Thomson Reuters, DBS HK

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Asian Insights SparX Hong Kong Property & Retail Sector

Chow Tai Fook PE Band Chow Tai Fook PB Band

x x 40 4.0 35 3.5 +1SD: 3x 30 3.0 +1SD: 24.9x Avg: 2.4x 25 2.5 20 2.0 Avg: 20.3x 15 1.5 10 -1SD: 15.7x 1.0 -1SD: 1.9x 5 0.5

0 0.0

Jul-18

Jul-18

Jun-17

Apr-13 Apr-14

Jun-17

Apr-13 Apr-14

May-15 May-16 May-16 May-15

Lifestyle PE Band Lifestyle PB Band

x x 9.0 45 8.0 40 7.0 35 6.0 30 25 5.0 +1SD: 4.6x 20 4.0 Avg: 3.3x +1SD: 19x 15 3.0 -1SD: 2.1x 10 Avg: 13.4x 2.0 5 -1SD: 7.9x 1.0

0 0.0

Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18

Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-04 Source: Thomson Reuters, DBS HK

ASIAN INSIGHTS Page 32

Asian Insights SparX Hong Kong Property & Retail Sector

STOCK PROFILES

Page 33

Asian Insights SparX Far East Consortium

Bloomberg: 35 HK | Reuters: 0035.HK Refer to important disclosures at the end of this report

BUY Hotels are a bright spot Last Traded Price (6 Jul 2018): HK$4.52 (HSI : 28,316) Price Target 12-mth: HK$5.53 (22% upside) • Local hotels going from strength to strength

• Overseas investments to drive long-term Potential Catalyst: Improving hotel market and successful project sales Where we differ: Market.has higher earnings estimate for FY19-20 growth • BUY with HK$5.53 TP Analyst Jeff YAU CFA, +852 2820 4912 [email protected]

Ian CHUI +852 2971 1915 [email protected] Local hotels going from strength to strength. Supported by the

Jason LAM +852 29711773 [email protected] return of overnight visitors, Far East Consortium’s (FEC) hotels in Hong Kong have recorded sequential operational improvements. Price Relative RevPAR growth in 2HFY18 (Oct-17 to Mar-18) improved by 13.5% from 1HFY18’s 8.3% as room rate growth accelerated. In addition to the revival of overnight visitor arrivals from China, FEC has attracted a diversified base of international travelers, particularly from South Korea and South East Asia. Opened for business in Jan- 17, Silka Tsuen Wan has rapidly ramped up its operations. With a portfolio of nine three-to-four star hotels (2868 rooms) spread across Hong Kong, FEC should continue to benefit from the hotel Forecasts and Valuation market upturn. Given improving hotel asset valuations, we do not FY Mar (HK$ m) 2017A 2018A 2019F 2020F rule out the possibility of the company crystallising the hidden value Turnover 5,005 5,831 6,117 6,622 of its hotels via disposal if opportunity knocks. EBITDA 1,694 2,220 2,203 2,157 Pre-tax Profit 1,567 2,156 1,604 1,533 Overseas investments to drive long-term growth. In recent Net Profit 1,118 1,567 1,142 1,144 months, FEC turned positive on the prospects of Singapore’s high- EPS (HK$) 0.51 0.69 0.50 0.50 EPS Gth (%) 40.7 34.4 (28.0) 0.1 end residential market. Since Mar-18, the company has acquired PE (X) 8.8 6.5 9.1 9.1 four residential lots/properties in Singapore through different P/Cash Flow (X) 8.4 82.6 (5.2) 2.2 channels. They will altogether provide attributable saleable area of EV/EBITDA (X) 9.5 7.2 7.3 7.4 0.3m sf. Total attributable land cost was S$562m. FEC has also DPS (HK$) 0.19 0.22 0.22 0.22 Div Yield (%) 4.1 4.9 4.9 4.9 expanded its footprint into the gaming sector with the acquisition Net Gearing (%) 31 29 37 27 of Trans World Corporation and 4.99% stake in The Star ROE (%) 10.7 13.2 8.6 8.2 Entertainment to complement its “Asian Wallet“ strategy. Even Est. NAV (HK$) 12.7 13.8 Disc. to NAV (%) (64) (67) allowing for these recent overseas investments, its financial risk should remain manageable. Earnings Rev (%): Nil NIl Consensus EPS (HK$): 0.67 0.74 BUY with HK$5.53 TP. The stock is trading at 64% discount to Other Broker Recs: B:3 S:0 H:0 our assessed current NAV with dividend yield of 4.9% for FY19.

ICB Industry: Financials Valuation is by no means expensive. The company is currently riding ICB Sector: Real Estate Holding & Development on the prevailing hotel market upcycle in Hong Kong. Moreover, it Principal Business: Engages in property development & investment, is proactively pursuing overseas investments, which could serve as hotel investment & operations, and car park and facility mangement share price catalyst if they bear fruit. BUY with HK$5.53 TP, operations across different cities Source of all data on this page: Company, DBS Bank (Hong Kong) premised on 60% discount to our Jun-19 NAV estimate. Limited (“DBS HK”) Thomson Reuters, HKEX

At A Glance Issued Capital (m shrs) 2,297 Mkt Cap (HK$m/US$m) 10,381 / 1,323 Major Shareholders (%) Chiu (Tat Cheong David) 46.8 Chiu (Te Ken Deacon) 6.8 Value Partners Ltd. 6.0 Free Float (%) 40.4 3m Avg. Daily Val. (US$m) 0.4

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Asian Insights SparX Far East Consortium

Income Statement (HK$ m) Balance Sheet (HK$ m) FY Mar 2017A 2018A 2019F 2020F FY Mar 2017A 2018A 2019F 2020F Turnover 5,005 5,831 6,117 6,622 Fixed Assets 10,483 11,404 11,946 12,381 EBITDA 1,694 2,220 2,203 2,157 Other LT Assets 2,025 2,403 2,453 2,508 Depr / Amort (324) (355) (370) (384) Cash & ST Invts 4,186 4,609 2,469 5,158 EBIT 1,370 1,865 1,834 1,772 Other Current Assets 11,705 16,073 20,824 18,838 Associates Inc (4) 10 10 15 Total Assets 28,400 34,489 37,691 38,885 Interest (Exp)/Inc (158) (212) (240) (254) ST Debt 2,755 6,194 6,194 6,194 Exceptionals 359 494 0 0 Creditors 889 1,725 2,025 2,325 Pre-tax Profit 1,567 2,156 1,604 1,533 Other Current Liab 2,536 2,364 2,614 2,864 Tax (434) (571) (446) (380) LT Debt 10,507 10,161 12,161 12,161 Minority Interest (15) (19) (15) (10) Other LT Liabilities 768 902 902 902 Net Profit 1,118 1,567 1,142 1,144 Minority Interests 152 173 183 188 Shareholder’s Equity 10,792 12,971 13,613 14,252 Total Cap. & Liab. 28,400 34,489 37,691 38,885 Sales Gth (%) 25 16 5 8 Share Capital (m) 2,238 2,302 2,302 2,302 Net Profit Gth (%) 52 40 (27) 0 Net Cash/(Debt) (7,646) (8,260) (10,923) (8,233) EBITDA Margins (%) 34 38 36 33 Working Capital 9,710 10,399 12,460 12,613 EBIT Margin (%) 27 32 30 27 Net Gearing (%) 31 29 37 27 Tax Rate (%) 28 26 28 25

Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Mar 2017A 2018E 2019F 2020F FY Mar 2017A 2018A 2019F 2020F EBIT 1,370 1,865 1,834 1,772 Revenues (HK$ m) Tax Paid (275) (571) (446) (380) Property Development 2,937 3,431 3,570 3,952 Depr/Amort 324 355 370 384 Property Investment 55 66 68 69 Chg in Wkg.Cap (556) (2,047) (4,201) 2,536 Hotel Operations 1,309 1,538 1,602 1,670 Other Non-Cash 38 (49) 1 1 Car Park Operations 641 666 696 731 Operating CF 901 (447) (2,443) 4,314 Others 64 130 182 200 Net Capex 80 (183) (911) (819) Assoc, MI, Invsmt (870) (35) (35) (35) Total 5,005 5,831 6,117 6,622 Investing CF (789) (218) (946) (854) Net Chg in Debt (450) 500 2,000 0 Key Assumptions (%) 2019F 2020F New Capital 2,309 0 0 0 Residential price - HK 13 0 Dividend (53) (422) (505) (510) Office rental - HK 5 3 Other Financing CF (363) (229) (246) (260) Retail rental (High street shops) - HK 0 5 Financing CF 1,443 (151) 1,249 (770) Retail rental (Shopping centre) - HK 5 5 Chg in Cash 1,555 (816) (2,140) 2,689 Hotel RevPAR 8 8

Source: Company, DBS HK

Page 35

Asian Insights SparX Hysan Development

Bloomberg: 14 HK | Reuters: 0014.HK Refer to important disclosures at the end of this report

BUY Creating a better shopping experience Last Traded Price (6 Jul 2018) HK$42.40 (HSI : 28,316) Price Target 12-mth: HK$51.15 (21% upside) • Riding on retail market upturn

Potential Catalyst: Stronger retail market • Offices at Three largely committed Where we differ: Market has similar earnings estimate for FY19 • BUY with HK$51.15 TP Analyst Jeff YAU CFA, +852 2820 4912 [email protected] Riding on the retail market upturn. In 5M18, the overall tenants’

Ian CHUI +852 2971 1915 [email protected] sales (excluding Apple) grew strongly by c.30% led by Lee Gardens hub and Hysan Place, both of which showed remarkable retail sales growth Jason LAM +852 29711773 [email protected] of > 30%. Lee Theatre hub, however, posted growth of just 7-8%, below the market average, dragged by certain tenants. Turnover rents Price Relative should receive a boost from sharply improved tenants’ sales. This should help offset the income shortfall led by the departure of high paying Ralph Lauren. The majority of space surrendered by Ralph Lauren has been re-let. In 2018, about 35% of lease is scheduled for expiry in terms of floor area. Of this, 80% has been or will be renewed at slightly higher rents. The remaining premises will be re-let. Despite potentially negative rental reversion, the trade mix refinement should enhance customers shopping experience. Lee Garden Three retail arcade had a soft opening in late May with commitment rate of c.90%. It hosts Forecasts and Valuation mainly lifestyle and F&B tenants. FY Dec (HK$ m) 2016A 2017A 2018F 2019F Turnover 3,535 3,548 3,800 4,081 Offices at Lee Garden Three largely committed. Office occupancy EBITDA 2,910 3,135 3,033 3,326 remains firm at 97%. About 24% of office floor area is scheduled for Pre-tax Profit 2,991 3,205 3,044 3,312 roll over in 2018. Reversionary growth is expected to moderate to 5-6% Underlying Profit 2,369 2,491 2,437 2,660 EPS (HK$) 2.26 2.38 2.33 2.54 on higher expiring rents. With Goldman Sachs taking up five floors for EPS Gth (%) 5.3 5.3 (2.2) 9.1 its back office operations, the office portion of the newly built Lee PE (X) 18.7 17.8 18.2 16.7 Garden Three is 95% committed with a significant portion of tenants P/Cash Flow (X) 13.3 15.3 14.6 13.3 relocating from Central/Admiralty. Residential portfolio, mainly Bamboo EV/EBITDA (X) 17.5 16.2 16.8 15.3 Grove, should see positive reversionary growth but occupancy has yet to DPS (HK$) 1.35 1.37 1.38 1.44 recover partly due to renovation works. Div Yield (%) 3.2 3.2 3.3 3.4 Net Gearing (%) 5 5 5 4 ROE (%) 3.5 3.6 3.4 3.6 BUY with HK$51.15 TP. The stock is trading at 44% discount to our Est. NAV (HK$) 76.3 78.7 assessed current NAV. From an historical viewpoint, valuation is Disc. to NAV (%) (44) (46) inexpensive. The company is benefitting from the prevailing retail market upturn. Continued trade/tenant mix optimisation could enhance Earnings Rev (%): Nil NIl the shopping experience. Despite short-term earnings drag, this should Consensus EPS (HK$): 2.72 2.59 boost the portfolio’s long-term competitiveness. BUY with HK$51.15 TP. Other Broker Recs: B:10 S:3 H:3 This is premised in 35% discount to our Jun-19 NAV estimate. ICB Industry: Financials At A Glance ICB Sector: Real Estate Holding & Development Principal Business: Property leasing with core focus in Causeway Bay Issued Capital (m shrs) 1,046 Mkt Cap (HK$m/US$m) 44,359 / 5,652 Major Shareholders (%) Source of all data on this page: Company, DBS Bank (Hong Kong) Limited (“DBS HK”) Thomson Reuters, HKEX Lee Hysan Company Ltd 41.4 Silchester International Investors, L.L.P. 8.0 First Eagle Investment Management, L.L.C. 5.0 Free Float (%) 45.6 3m Avg. Daily Val. (US$m) 5.1

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Asian Insights SparX Hysan Development

Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2016A 2017A 2018F 2019F FY Dec 2016A 2017A 2018F 2019F Turnover 3,535 3,548 3,800 4,081 Fixed Assets 70,353 73,221 74,545 76,000 EBITDA 2,910 3,135 3,033 3,326 Other LT Assets 5,396 5,501 5,906 6,523 Depr / Amort (22) (22) (22) (22) Cash & ST Invts 2,630 2,662 2,626 3,206 EBIT 2,888 3,113 3,011 3,304 Other Current Assets 1,642 738 723 708 Associates Inc 231 209 208 223 Total Assets 80,021 82,122 83,801 86,437 Interest (Exp)/Inc (128) (117) (175) (215) ST Debt 1,180 150 300 300 Exceptionals 0 0 0 0 Creditors 935 736 721 706 Pre-tax Profit 2,991 3,205 3,044 3,312 Other Current Liab 778 875 875 875 Tax (463) (484) (461) (502) LT Debt 5,113 6,035 5,785 5,685 Minority Interest (159) (230) (146) (150) Other LT Liabilities 1,330 1,323 1,323 1,323 Underlying Profit 2,369 2,491 2,437 2,660 Minority Interests 3,195 3,048 3,148 3,291 Shareholder’s Equity 67,490 69,955 71,648 74,257 Total Cap. & Liab. 80,021 82,122 83,801 86,437 Sales Gth (%) 3 0 7 7 Share Capital (m) 1,046 1,046 1,046 1,046 Net Profit Gth (%) 4 5 (2) 9 Net Cash/(Debt) (3,663) (3,523) (3,459) (2,779) EBITDA Margins (%) 82 88 80 81 Working Capital 1,379 1,639 1,453 2,033 EBIT Margin (%) 82 88 79 81 Net Gearing (%) 5 5 5 4 Tax Rate (%) 15 15 15 15

Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2016A 2017A 2018F 2019F FY Dec 2016A 2017A 2018F 2019F EBIT 2,888 3,113 3,011 3,304 Revenues (HK$ m) Tax Paid (407) (410) (461) (502) Property rental income 3,535 3,548 3,800 4,081 Depr/Amort 22 22 22 22 Total 3,535 3,548 3,800 4,081 Chg in Wkg.Cap 411 15 0 0 Other Non-Cash 5 (250) 0 0 Operating CF 2,919 2,490 2,573 2,824 Net Capex (847) (2,140) (622) 0 Assoc, MI, Invsmt (639) 2,186 (152) (349) Investing CF (1,486) 46 (774) (349) Net Chg in Debt (250) (130) (100) (100) Key Assumptions (%) 2018F 2019F New Capital 1,285 0 0 0 Dividend (1,524) (1,539) (1,514) (1,535) Office rental - HK 5 3 Other Financing CF (161) (200) (220) (260) Retail rental (High street shops) - HK 0 5 Financing CF (650) (1,869) (1,834) (1,895) Retail rental (Shopping centre) - HK 5 5 Chg in Cash 783 667 (36) 580

Source: Company, DBS HK

Page 37

Asian Insights SparX Langham Hospitality Investments

Bloomberg: 1270 HK | Reuters: 1270.HK Refer to important disclosures at the end of this report

BUY Facelift at Eaton to boost competitiveness Last Traded Price (6 Jul 2018): HK$3.17 (HSI : 28,316) Price Target 12-mth: HK$3.68 (16% upside) • Renovation allows Eaton to better cater to targeted Potential Catalyst: Improving hotel market travelers Where we differ: Market has similar DPU estimate for FY18. • Higher RevPAR at The Langham and Cordis Analyst Jeff YAU CFA, +852 2820 4912 • BUY with HK$3.68 TP [email protected]

Ian CHUI +852 2971 1915 Renovation to allow Eaton better capture targeted [email protected] travelers. The renovation at Eaton’s hotel entrance has been Jason LAM +852 29711773 completed and the food hall at the basement is already operating. [email protected] The co-working space is targeted to be completed in Aug-18 . The retail shops would be leased to F&B tenants. Hence, F&B and retail income from Eaton is expected to recover gradually from 2Q18 Price Relative onwards. In Mar-18, Langham Hospitality Investments commenced its room renovation programme at Eaton, to be carried out in four phases. This would reduce the number of rooms available in the meantime, thus diluting room revenue. Despite the short term income shortfall, this initiative should enable the hotelier to better tap the demand from millennial travelers and enhance the long-term competitiveness of Eaton.

Higher RevPAR at The Langham and Cordis. Aided by the Forecasts and Valuation FY Dec (HK$ m) 2016A 2017A 2018F 2019F revival of overnight visitor arrivals, The Langham in Tsim Sha Tsui Gross Revenue 706 694 708 762 and Cordis in Mongkok registered RevPAR growth of c.9% in Net Property Inc 594 581 592 638 4M18, primarily led by better room rates. F&B revenue grew in the Net Profit 410 1,146 356 378 Distribution Inc 501 437 420 447 mid-single digits. This should lead to higher gross operating DPU (HK$) 0.26 0.22 0.20 0.21 profits. On the other hand, despite higher room rates, RevPAR of DPU Gth (%) 4 (15) (7) 5 Eaton in Yau Ma Tei was marginally lower, dragged by reduced Div Yield (%) 8.0 6.8 6.3 6.6 occupancy as a result of ongoing renovation works. Gross Gearing (%) 36 35 33 32 Book Value (HK$) 5.65 5.93 6.32 6.54 BUY with HK$3.68 TP Langham Hospitality Investments offers P/Book Value (x) 0.6 0.5 0.5 0.5 distribution yields of 6.3-6.6% for FY18-19. With a portfolio of three strategically located hotels in Kowloon, Langham Hospitality Earnings Rev (%): (6) (3) Consensus DPU (HK$): 0.15 0.17 Investments should be well placed to riding on the hotel sector Other Broker Recs: B:1 S:1 H:1 upturn led by improving inbound tourism. Despite the short term business disruption, the renovation should allow Eaton to boost its ICB Industry: Financials long-term competitiveness. BUY with DDM-based TP of HK$3.68 ICB Sector: Equity Investment Instruments Principal Business: Hotels At A Glance Source of all data on this page: Company, DBS Bank (Hong Kong) Limited (“DBS HK”) Thomson Reuters, HKEX Issued Capital (m shrs) 2,099 Mkt Cap (HK$m/US$m) 6,654 / 848 Major Shareholders (%) Great Eagle Holdings Ltd 62.5 Free Float (%) 37.5 3m Avg. Daily Val. (US$m) 0.3

ed-JS/ sa- CS /AH

Asian Insights SparX Langham Hospitality Investments

Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2016A 2017A 2018F 2019F FY Dec 2016A 2017A 2018F 2019F Gross revenue 706 694 708 762 Fixed Assets 18,432 19,373 20,422 21,084 Property expenses (113) (113) (116) (124) Other LT Assets 32 28 28 28 Net Property Income 594 581 592 638 Cash & ST Invts 238 101 20 3 Other expenses (11) (9) (9) (9) Other Current Assets 121 115 120 125 Interest (Exp)/Inc (118) (153) (178) (195) Total Assets 18,824 19,618 20,590 21,241 Exceptionals 28 805 0 0 ST Debt 0 0 0 6,791 Pre-Tax Profit 493 1,223 405 435 Creditors 78 97 96 95 Tax (83) (77) (49) (57) Other Current Liab 33 24 24 24 Non-Controlling Interests 0 0 0 0 LT Debt 6,739 6,757 6,774 0 Net Profit 410 1,146 356 378 Other LT Liabilities 297 329 329 329 Distribution income 501 437 420 447 Non-Controlling Interests 0 0 0 0 Unitholders’ funds 11,677 12,411 13,367 14,002 Revenue Gth (%) 4 (2) 2 8 Total Capital 18,824 19,618 20,590 21,241 NPI Gth (%) 5 (2) 2 8 Share Capital (m) 2,067 2,088 2,110 2,133 Dist. Inc Growth (%) 5 (13) (4) 6 Gross Debt (6,800) (6,800) (6,800) (6,800) DPU Growth (%) 4 (15) (7) 5 Working Capital 249 96 20 (6,781) Book NAV (HK$) 5.65 5.94 6.33 6.56 Gross Gearing (%) 36 35 33 32

Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2016A 2017A 2018F 2019F FY Dec 2016A 2017A 2018F 2019F Pre-Tax Income 493 1,223 405 435 Revenues (HK$ m) Tax Paid 0 (55) (49) (57) Base rent 225 225 225 225 Depr/Amort 25 18 17 17 Variable rent 476 468 481 535 Chg in Wkg.Cap. (7) 10 (6) (6) Rental income from retail 6 1 2 2 Other Non-Cash 42 (734) 69 76 Total 706 694 708 762 Operational CF 552 463 436 465 Net Capex (65) (119) (80) (50) Assoc, MI, Invsmt 62 2 2 2 Investment CF (3) (118) (78) (48) Net Chg in Debt (72) 0 0 0 Key Assumptions (%) 2018F 2019F New issues/Unit Buyback 0 0 0 0 RevPAR 8 8 Distribution Paid (483) (483) (440) (434) Other Financing CF 0 0 0 0 Financing CF (555) (483) (440) (434) Chg in Cash (6) (137) (81) (17)

Source: Company, DBS HK

Page 39

Asian Insights SparX Regal REIT

Bloomberg: 1881 HK | Reuters: 1881.HK Refer to important disclosures at the end of this report

BUY Room to grow Last Traded Price (6 Jul 2018): HK$2.30 (HSI : 28,316) Price Target 12-mth: HK$2.61 (13% upside) • Hotel RevPAR headed higher Potential Catalyst: Improving hotel makret • Potential acquisitions to spice up distributions Where we differ: n.a. • BUY with HK$2.61 TP Analyst Jeff YAU CFA, +852 2820 4912, [email protected] Ian CHUI+852 2971 1915, Hotel RevPAR headed higher. Aided by the revival of overnight [email protected] visitor arrivals from Mainland China, Regal REIT’s hotels witnessed Jason LAM +852 29711773, solid RevPAR growth of >10% in 4M18, mainly led by higher [email protected] room rates. The “Regal” branded hotels performed better than “iclub” branded hotels. Given positive operating leverage, we forecast gross operating profit from initial hotel portfolio to be Price Relative c.9% higher in FY18. As a result, initial hotel portfolio should see remarkable growth in variable rents in addition to 2.5% increase in base rents. This, coupled with the full-year rental contributions from newly acquired iclub Ma Tau Wai Hotel, should more than offset the income shortfall from iclub Sheung Wan Hotel and iclub Fortress Hill Hotel, and increased cash finance costs. Potential acquisitions to spice up distributions. Its parent Regal Hotels International, through P&R Holdings, is developing iclub Forecasts and Valuation Mongkok Hotel and iclub SoHo Hotel which are anticipated to FY Dec (HK$ m) 2016A 2017A 2018F 2019F open for business in 2019. They are located near Mongkok and Gross Revenue 973 958 1,020 1,094 Net Property Inc 944 927 988 1,062 Sheung Wan MTR stations, pointing to convenient transportation Net Profit 564 2,488 493 514 accessibility. Potential acquisitions of these two limited service Distribution Inc 502 472 486 510 hotels could add spice to Regal REIT’s future distribution income. DPU (HK$) 0.15 0.15 0.15 0.16 DPU Gth (%) 0 (6) 3 5 BUY with HK$2.61 TP. Regal REIT is trading at distribution yields Div Yield (%) 6.7 6.3 6.5 6.8 of 6.5-6.8% for FY18-19. The new mega infrastructure projects Gross Gearing (%) 37 38 36 34 Book Value (HK$) 4.13 4.75 5.19 5.52 including the Express Rail Link and Hong Kong-Zhuhai-Macau P/Book Value (x) 0.6 0.5 0.4 0.4 should improve the connectivity between Hong Kong and Mainland China, and should stimulate the growth of inbound Earnings Rev (%): 0 0 Consensus DPU (HK$): 0.15 0.16 tourism. This augurs well for Regal REIT’s growth prospects. Other Broker Recs: B:2 S:0 H:0 Potential yield-accretive acquisitions could add to its investment

ICB Industry: Financials appeal. BUY with HK$2.61 TP. With all debts on floating rate ICB Sector: REITs (HK) basis, interest rate hike remains the major investment risk. Principal Business: Owns and operates hotels in HK Source of all data on this page: Company, DBS Bank (Hong Kong) Limited (“DBS HK”) Thomson Reuters, HKEX At A Glance Issued Capital (m shrs) 3,257 Mkt Cap (HK$m/US$m) 7,492 / 955 Major Shareholders (%) Regal Hotels International Holdings Ltd 74.6 Nuveen LLC 10.5 Free Float (%) 14.9 3m Avg. Daily Val. (US$m) 0.2

Page 40

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Asian Insights SparX Regal REIT

Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2016A 2017A 2018F 2019F FY Dec 2016A 2017A 2018F 2019F Gross revenue 973 958 1,020 1,094 Fixed Assets 21,632 25,136 26,558 27,670 Property expenses (30) (31) (32) (32) Other LT Assets 590 656 659 662 Net Property Income 944 927 988 1,062 Cash & ST Invts 122 102 113 134 Other expenses (115) (153) (129) (135) Other Current Assets 33 64 70 72 Interest (Exp)/Inc (235) (224) (248) (289) Total Assets 22,377 25,958 27,400 28,538 Exceptionals 91 2,044 0 0 ST Debt 170 2,823 2,603 1,625 Pre-Tax Profit 685 2,595 612 638 Creditors 62 99 99 99 Tax (121) (106) (119) (124) Other Current Liab 98 68 68 68 Non-Controlling Interests 0 0 0 0 LT Debt 8,104 6,931 7,150 8,128 Net Profit 564 2,488 493 514 Other LT Liabilities 505 553 589 626 Distribution income 502 472 486 510 Non-Controlling Interests 0 0 0 0 Unitholders’ funds 13,438 15,485 16,890 17,991 Revenue Gth (%) (3) (2) 6 7 Total Capital 22,377 25,958 27,400 28,538 NPI Gth (%) (3) (2) 7 7 Share Capital (m) 3,257 3,257 3,257 3,257 Dist. Inc Growth (%) 0 (6) 3 5 Gross Debt (8,274) (9,753) (9,753) (9,753) DPU Growth (%) 0 (6) 3 5 Working Capital (175) (2,824) (2,588) (1,587) Book NAV (HK$) 4.13 4.75 5.19 5.52 Gross Gearing (%) 37 38 36 34

Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2016A 2017A 2018F 2019F FY Dec 2016A 2017A 2018F 2019F Pre-Tax Income 685 2,595 612 638 Revenues (HK$ m) Tax Paid (75) (124) (83) (87) Rental revenue 940 923 983 1,055 Depr/Amort 8 9 9 9 Hotel revenue 34 35 37 39 Chg in Wkg.Cap. (18) 28 0 0 Total 973 958 1,020 1,094 Other Non-Cash (43) (2,015) (6) (2) Operational CF 556 493 531 558 Net Capex (62) (102) (49) (51) Assoc, MI, Invsmt (17) (1,364) 0 0 Investment CF (78) (1,467) (49) (51) Net Chg in Debt 45 1,452 0 0 Key Assumptions (%) 2018F 2019F New issues/Unit Buyback 0 0 0 0 Distribution Paid (502) (502) (472) (486) Hotel RevPAR 8 8 Other Financing CF 0 0 0 0 Financing CF (457) 950 (472) (486) Chg in Cash 21 (24) 10 21

Source: Company, DBS HK

Page 41

Asian Insights SparX Wharf REIC

Bloomberg: 1997 HK | Reuters: 1997.HK Refer to important disclosures at the end of this report

BUY Riding on rising retail consumption Last Traded Price (6 Jul 2018): HK$56.45 (HSI : 28,316) Price Target 12-mth: HK$65.40 (16% upside) (Prev HK$64.70) • Robust retail sales growth to boost turnover rents

Potential Catalyst: stronger retail market • Usage conversion to exploit earnings potential of Where we differ: Market has slightly lower earnings estimate for FY18- Harbour City 19 Analyst • BUY with HK$65.40 TP Jeff YAU CFA, +852 2820 4912 [email protected] Robust retail sales growth to boost turnover rents. Benefitting from Ian CHUI +852 2971 1915 improved tourist spending and increased local consumption, Wharf [email protected] REIC’s two landmark shopping malls recorded notable increases in Jason LAM +852 29711773 tenants’ sales. Retail tenants’ sales growth at Harbour City in Tsim Sha [email protected] Tsui accelerated to 37% in 1Q18, from 2017’s 9.1%. Times Square showed encouraging retail sales growth of 23% in the same period, and Price Relative this compares favourably with 1.1% in 2017. Both malls outperformed the overall Hong Kong retail sector. Key contributor to robust tenants’ sales was luxury product sector thanks to an upswing in inbound tourism. Electronics/audio visual sector also posted a solid performance, reversing the previous downtrend. Spectacular retail sales improvement should boost the turnover rents which stood at HK$738m or 8% of the company’s retail revenue in FY17. Moreover, this also underpins stronger reversionary growth in the years ahead. Overall, we forecast Harbour City and Times Square to show 5-6% growth in retail income in FY18 led by Forecasts and Valuation notably higher turnover rents and favourable rental reversion. FY Dec (HK$ m) 2017A 2018F 2019F Turnover 20,904 15,992 16,641 Usage conversion to exploit the earnings potential of Harbour EBITDA 15,495 12,448 13,007 City. Wharf REIC is converting the serviced apartments at Hampton Pre-tax Profit 14,433 11,254 11,651 Court into office premises. Conversion works are expected to be Underlying Profit 9,500 9,330 9,638 completed in 3Q19. In view of higher rental yields for office, this initiative EPS (HK$) 3.13 3.07 3.17 should be value accretive despite the minor income shortfall during the EPS Gth (%) 11.4 (1.8) 3.3 PE (X) 18.0 18.4 17.8 period of usage conversion. The Murray, a Niccolo hotel converted from DPS (HK$) 0.95 1.96 2.00 an ex-government building, opened for business early this year. Although Div Yield (%) 1.7 3.5 3.5 the inbound tourism recovery has been gathering momentum, this luxury Net Gearing (%) 20 19 18 hotel is not expected to make any meaningful contributions initially due ROE (%) 4.7 4.4 4.3 to depreciation and amortisation expenses (c.HK$140m p.a.) Est. NAV (HK$) 76.6 81.6 Disc. to NAV (%) (26) (31) BUY with HK$65.40 TP. The stock is trading at 26% discount to our

Earnings Rev (%): Nil Nil appraised current NAV. With strong foothold in the retail property Consensus EPS (HK$): 3.05 3.25 market, Wharf REIC should stand to benefit the most from the retail Other Broker Recs: B:9 S:0 H:6 market upturn. From this perspective, we see further upside potential for ICB Industry: Financials its share price. BUY with HK$65.40TP, based on 20% discount to our ICB Sector: Real Estate Holding & Development Jun-19 NAV estimate. Principal Business: Engaged mainly in property investments and hotel operations in Hong Kong. Owns a 72% stake in Harbour Centre Development (51.HK). At A Glance

Source of all data on this page: Company, DBS Bank (Hong Kong) Issued Capital (m shrs) 3,036 Limited (“DBS HK”) Thomson Reuters, HKEX Mkt Cap (HK$m/US$m) 171,395 / 21,838 Major Shareholders (%) Wheelock and Co Ltd 61.6 Free Float (%) 38.4 3m Avg. Daily Val. (US$m) 21.0

ed-JS/ sa- CS /AH

Asian Insights SparX Wharf REIC

Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2017A 2018F 2019F FY Dec 2017A 2018F 2019F Turnover 20,904 15,992 16,641 Fixed Assets 262,376 271,203 277,662 EBITDA 15,495 12,448 13,007 Other LT Assets 6,408 6,608 6,758 Depr / Amort (144) (288) (300) Cash & ST Invts 3,076 3,179 3,290 EBIT 15,351 12,160 12,707 Other Current Assets 815 1,770 2,550 Associates Inc 67 200 150 Total Assets 272,675 282,760 290,261 Interest (Exp)/Inc (985) (1,106) (1,206) ST Debt 20,800 1,500 4,900 Exceptionals 0 0 0 Creditors 8,805 9,005 8,805 Pre-tax Profit 14,433 11,254 11,651 Other Current Liab 2,829 2,829 2,829 Tax (4,267) (1,824) (1,898) LT Debt 24,752 43,052 38,652 Minority Interest (666) (99) (116) Other LT Liabilities 2,521 2,521 2,521 Underlying Profit 9,500 9,330 9,638 Minority Interests 5,650 5,449 5,265 Shareholder’s Equity 207,318 218,403 227,288 Total Cap. & Liab. 272,675 282,760 290,261 Sales Gth (%) 24 (23) 4 Share Capital (m) 3,036 3,036 3,036 Net Profit Gth (%) 12 (2) 3 Net Cash/(Debt) (42,476) (41,373) (40,262) EBITDA Margins (%) 74 78 78 Working Capital (28,543) (8,385) (10,694) EBIT Margin (%) 73 76 76 Net Gearing (%) 20 19 18 Tax Rate (%) 30 16 16

Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2017A 2018F 2019F FY Dec 2017A 2018F 2019F EBIT 15,351 12,160 12,707 Revenues (HK$ m) Tax Paid (1,745) (1,824) (1,898) Investment Property 13,334 13,731 14,275 Depr/Amort 144 288 300 Development Property 5,907 0 0 Chg in Wkg.Cap (3,282) (1,410) (1,460) Hotels 1,403 1,996 2,096 Other Non-Cash (820) (136) (136) Others 260 265 271 Operating CF 9,648 9,077 9,513 Total 20,904 15,992 16,641 Net Capex (2,507) (1,500) (1,500) Assoc, MI, Invsmt (10,106) 0 0 Investing CF (12,613) (1,500) (1,500) Net Chg in Debt 41,170 (1,000) (1,000) Key Assumptions (%) 2018F 2019F New Capital 1,000 0 0 Dividend (10,374) (6,160) (6,312) Office rental - HK 5 3 Other Financing CF (31,319) 0 0 Retail rental (High street shops) - HK 0 5 Financing CF 477 (7,160) (7,312) Retail rental (Shopping centre) - HK 5 5 Chg in Cash (2,488) 417 702

Source: Company, DBS HK

Page 43

Asian Insights SparX Chow Sang Sang

Bloomberg: 116 HK EQUITY | Reuters: 0116.HK Refer to important disclosures at the end of this report

BUY Lower base; brighter growth outlook Last Traded Price (6 Jul 2018):HK$14.82 (HSI : 28,316) • Sequential SSSG improvement in HK/Macau during 1H18 Price Target 12-mth: HK$20.65 (39.3% upside) • Better store-level efficiency, product-mix refinement and its lower Potential Catalyst: Rising tourist mobility & consumption; online sales base vs. major peers should all help earnings outlook Where we differ: Yet to include benefits from better infrastructural connections between China and HK/Macau • Coupled with impending volume drivers from infrastructural Analyst improvements and better prospects of the Greater Bay Area, BUY. Mavis HUI +852 2863 8879 [email protected] Multiple catalysts. We stay positive for Chow Sang Sang’s (“CSS”) Price Relative business outlook, especially for the coming 1-2 years given its lower HK$ Relative Index base versus major peers, a YTD pick-up in tourist consumption in 23.9 214 HK/Macau, and the inauguration of HK High-Speed Rail and the HK- 21.9 194 19.9 174 Zhuhai-Macau Bridge to potentially attract more inbound tourists. 17.9 154 Decent medium-term outlook also comes from the Greater Bay Area 134 15.9 114 development to strengthen S. China economic conditions and 13.9 94 travellers’ mobility. Its better operating leverage and normalized gross 11.9 74 9.9 54 margin for gold products also help earnings. Our projection has yet to Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 include benefits from impending infrastructural improvements. Chow Sang Sang (LHS) Relative HSI (RHS) Sound SSSG in HK/Macau. Following a low-teens’ same-store sales Forecasts and Valuation growth (SSSG) in HK/Macau during 1Q18, channel checks suggest a FY Dec (HK$ m) 2016A 2017A 2018F 2019F sequential SSSG improvement in May-Jun 2018, as compared to Mar- Turnover 16,093 16,633 17,916 19,357 EBITDA 1,163 1,165 1,380 1,608 Apr this year. After all, CSS also benefits from a relatively lower base Pre-tax Profit 1,000 1,137 1,200 1,395 for 1H18 (1H17: -3%) as compared to key competitors (1H17: Chow Net Profit 742 876 924 1,075 Tai Fook up 4-5%; Luk Fook up 2-3%). In China, CSS could see a Core Profit 744 763 924 1,075 EPS (HK$) 1.10 1.29 1.37 1.59 more diverse performance in 1H18, with two-thirds of the time Core EPS (HK$) 1.10 1.13 1.37 1.59 seeing single-digit positive SSSG, and the rest a negative SSSG. EPS Gth (%) (34.3) 18.1 5.5 16.3 Overall, group level performance remains promising. Core EPS Gth (%) (10.0) 2.6 21.1 16.3 Diluted EPS (HK$) 1.10 1.29 1.37 1.59 Better margin prospects. On the back of strengthening SSSG in DPS (HK$) 0.43 0.51 0.54 0.63 HK/Macau markets that bear comparatively higher fixed costs, we BV Per Share (HK$) 13.35 14.96 15.78 16.75 could see better operating leverage to lift margins. A stronger PE (X) 13.5 11.4 10.9 9.3 Core PE (X) 13.5 13.1 10.9 9.3 demand for mid-ranged jewellery products (e.g. 1ct. diamonds) that P/Cash Flow (X) 30.7 (98.9) 18.6 15.7 contribute slightly higher gross margins could also mean potential P/Free CF (X) 76.9 (31.6) 41.7 29.7 improvement in profitability. In terms of sales network, CSS focuses EV/EBITDA (X) 9.1 9.3 8.0 6.9 Net Div Yield (%) 2.9 3.4 3.6 4.2 on store-level performance, including the gradual adoption of more P/Book Value (X) 1.1 1.0 0.9 0.9 efficient store size (1,000-1,500 GFA) in HK/Macau, and migration of Net Debt/Equity (X) 0.1 0.1 0.1 0.1 stores from department stores to quality shopping malls in China. ROAE (%) 8.2 9.1 8.9 9.8 At A Glance Earnings Rev (%): Nil Nil Issued Capital (m shrs) 677 Consensus EPS (HK$) 1.40 1.56 Mkt Cap (HK$m/US$m) 10,175 / 1,296 Other Broker Recs: B:6 S:0 H:5 Major Shareholders (%) Everwin Company Ltd 17.7 Source of all data on this page: Company, DBS Bank (Hong Kong) Happy Incorporated 9.7 Limited (“DBS HK”), Thomson Reuters, HKEX Capital World Investors 8.2 Happy Family Limited 8.0 Capital Research Global Investors 7.9 Free Float (%) 48.5 3m Avg. Daily Val. (US$m) 0.6 ICB Industry: Consumer Services / General Retailers

Page 44 sa- CS / CW

Asian Insights SparX Chow Sang Sang

Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2016A 2017A 2018F 2019F FY Dec 2016A 2017A 2018F 2019F Turnover 16,093 16,633 17,916 19,357 Net Fixed Assets 1,000 1,084 1,141 1,207 Cost of Goods Sold (12,042) (12,643) (13,573) (14,621) Invts in Assocs & JVs 28 32 32 32 Gross Profit 4,050 3,991 4,343 4,736 Other LT Assets 1,029 1,119 1,140 1,163 Other Opng (Exp)/Inc (3,097) (3,036) (3,200) (3,386) Cash & ST Invts 1,316 1,217 913 660 Operating Profit 954 955 1,144 1,350 Inventory 6,558 7,490 8,004 8,581 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 1,842 2,212 2,383 2,574 Associates & JV Inc 4 5 5 5 Other Current Assets 429 516 516 516 Net Interest (Exp)/Inc 21 44 31 20 Total Assets 12,201 13,670 14,129 14,734 Dividend Income 23 20 20 20 Exceptional Gain/(Loss) (1) 113 0 0 ST Debt 1,483 1,618 1,404 1,233 Pre-tax Profit 1,000 1,137 1,200 1,395 Creditors 1,026 1,160 1,246 1,342 Tax (258) (261) (275) (320) Other Current Liab 97 98 104 110 Minority Interest 0 0 0 0 LT Debt 360 454 454 454 Preference Dividend 0 0 0 0 Other LT Liabilities 197 215 236 260 Net Profit 742 876 924 1,075 Shareholder’s Equity 9,038 10,125 10,685 11,336 Net Profit before Except. 744 763 924 1,075 Minority Interests 0 0 0 0 EBITDA 1,163 1,165 1,380 1,608 Total Cap. & Liab. 12,201 13,670 14,129 14,734 Sales Gth (%) (15.6) 3.4 7.7 8.0 EBITDA Gth (%) (6.4) 0.2 18.4 16.5 Non-Cash Wkg. Cap 7,706 8,959 9,553 10,220 Opg Profit Gth (%) (7.6) 0.2 19.7 18.0 Net Cash/(Debt) (527) (855) (945) (1,026) Net Profit Gth (%) (34.3) 18.1 5.5 16.3 Effective Tax Rate (%) 25.8 23.0 23.0 23.0

Cash Flow Statement (HK$ m) Rates & Ratio FY Dec 2016A 2017A 2018F 2019F FY Dec 2016A 2017A 2018F 2019F Pre-Tax Profit 1,000 1,137 1,200 1,395 Gross Margins (%) 25.2 24.0 24.2 24.5 Dep. & Amort. 182 185 211 232 Opg Profit Margin (%) 5.9 5.7 6.4 7.0 Tax Paid (234) (261) (275) (320) Net Profit Margin (%) 4.6 5.3 5.2 5.6 Assoc. & JV Inc/(loss) (4) (5) (5) (5) ROAE (%) 8.2 9.1 8.9 9.8 (Pft)/ Loss on disposal of FAs 239 0 0 0 ROA (%) 6.1 6.8 6.6 7.4 ChgFAFAsiaries/Investments in Wkg.Cap. (-/+) (854) (1,168) (599) (673) ROCE (%) 6.4 6.3 7.0 8.0 Other Operating CF (3) 9 9 9 Div Payout Ratio (%) 39.2 39.4 39.4 39.4 Net Operating CF 327 (101) 540 638 Net Interest Cover (x) NM NM NM NM Capital Exp.(net) (196) (216) (300) (300) Asset Turnover (x) 1.3 1.3 1.3 1.3 Other Invts.(net) 0 0 0 0 Debtors Turn (avg days) 33.9 44.5 46.8 46.7 Invts in Assoc. & JV 3 0 0 0 Creditors Turn (avg days) 29.8 32.0 32.9 32.8 Div from Assoc & JV 24 20 20 20 Inventory Turn (avg days) 203.6 205.8 211.6 210.4 Other Investing CF (1) 30 (21) (23) Current Ratio (x) 3.9 4.0 4.3 4.6 Net Investing CF (171) (166) (301) (303) Quick Ratio (x) 1.2 1.2 1.2 1.2 Div Paid (393) (345) (364) (424) Net Debt/Equity (X) 0.1 0.1 0.1 0.1 Chg in Gross Debt 126 86 0 0 Capex to Debt (%) 10.7 10.4 16.1 17.8 Capital Issues 0 0 0 0 Z-Score (X) 5.3 4.9 4.9 5.1 Other Financing CF (174) 444 (179) (163) N.Cash/(Debt)PS (HK$) (0.78) (1.26) (1.40) (1.52) Net Financing CF (440) 185 (543) (587) Opg CFPS (HK$) 1.74 1.58 1.68 1.94 Currency Adjustments (54) 0 0 0 Free CFPS (HK$) 0.19 (0.47) 0.36 0.50 Chg in Cash (338) (83) (304) (252)

Source: Company, DBS HK

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Asian Insights SparX Chow Tai Fook

Bloomberg: 1929 HK EQUITY | Reuters: 1929.HK Refer to important disclosures at the end of this report

NOT RATED More strategic moves to drive growth Last Traded Price (6 Jul 2018):HK$8.34 (HSI : 28,316) • The leading regional jewellery play that will benefit from rising Price Target 12-mth: N.A. spending power & mobility of Mainland Chinese consumers Potential Catalyst: Rising tourist mobility & consumption; online sales • Additional product, brand & store varieties should all help Where we differ: Slightly more prudent estimates on margin growth vs. beefing up market share further consensus • Aside from infrastructural improvements in HK/Macau, medium- Analyst Mavis HUI +852 2863 8879 [email protected] term potentials include Greater Bay Area development, S. China. Size matters. As the leading jewellery retailer in Greater China with strong heritage of nearly 90 years, Chow Tai Fook (“CTF”) possesses Price Relative one of the best position to sustain growth. In recent years, its efforts HK$ Relative Index to explore into new brands & products, roll-out of new store labels, 12.8 221 tapping into new markets (e.g. Japan), and enhancement of its IT & 11.8 201 10.8 181 systems for better big data analyses could all provide more potential 9.8 161 growth drivers in medium run. Coupled with sound YTD sales 8.8 141 7.8 121 momentum in its core HK/Macau markets, robust online performance 6.8 101 in China, and the impending opportunities from infrastructural & 5.8 81 economic enhancement in the Greater Bay Area, CTF is well-poised to 4.8 61 3.8 41 better ride on an improving business outlook. Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Sound YTD performance. CTF scored 17% SSSG in HK/Macau, as Chow Tai Fook (LHS) Relative HSI (RHS) well as 7% SSSG in China during Jan-Mar 2018. Recent sales Forecasts and Valuation momentum for Apr-Jun 2018 should sustain a similar growth level. FY Mar (HK$ m) 2017A 2018A 2019F 2020F While the company is guiding mid single-digit SSSG for HK/Macau Turnover 51,246 59,156 65,109 69,970 and low single-digit SSSG for China in FY19, we believe they are EBITDA 5,116 6,589 7,592 8,442 prudent guidance, especially with HK/China already scoring double- Pre-tax Profit 4,378 5,832 6,525 7,295 Net Profit 3,055 4,095 4,820 5,461 digit SSSG in 1Q FY19, the low base for 3Q FY19 (3Q FY18: 5% EPS (HK$) 0.31 0.41 0.48 0.55 SSSG), and impending inauguration of the HK High-Speed Rail (Sep EPS Gth (%) 3.9 34.0 17.7 13.3 2018) to potentially bring more Mainland tourists into HK/Macau. Diluted EPS (HK$) 0.31 0.41 0.48 0.55 Chinese visitor consumption contributed 45% of CTF’s HK/Macau DPS (HK$) 0.00 0.00 0.00 0.00 revenue in FY18 (FY17: 44%) and sees ample room to expand ahead. BV Per Share (HK$) 3.18 3.34 3.37 3.44 PE (X) 27.3 20.4 17.3 15.3 Good efforts on newer strategies. In recent years, CTF has rolled P/Cash Flow (X) 13.3 29.3 9.8 14.3 out new products and store labels to extend its reach to different P/Free CF (X) 14.9 42.4 10.9 16.8 customers. Aside from its earlier acquisition of the US label “House Of EV/EBITDA (X) 16.1 13.1 10.8 9.8 Fire” (US$150m), the company also launches its own brand “T Net Div Yield (%) 0.0 0.0 0.0 0.0 Mark” that offers traceable diamonds, as well as SOINLOVE and P/Book Value (X) 2.6 2.5 2.5 2.4 Net Debt/Equity (X) CASH 0.1 CASH CASH MONOLOGUE stores that mainly serve the niche wedding market and ROAE (%) 9.2 12.6 14.4 16.0 young consumers, respectively. All such moves should enhance its ability to further expand its leading market share in the region. Consensus EPS (HK$) 0.50 0.56 At A Glance Other Broker Recs: B:10 S:1 H:10 Issued Capital (m shrs) 10,000 Source of all data on this page: Company, DBS Bank (Hong Kong) Mkt Cap (HK$m/US$m) 85,600 / 10,906 Limited (“DBS HK”), Thomson Reuters, HKEX Major Shareholders (%) Chow Tai Fook (Holding) Ltd. 89.3 Free Float (%) 10.7 3m Avg. Daily Val. (US$m) 6.3 ICB Industry: Consumer Services / General Retailers

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DBS HK's discussion of the issuer (Chow Tai Fook (1929 HK)) in this report will not be continuously followed. Accordingly, this report is being provided as a stand-alone analysis and recipients of this report should not expect additional reports relating to this issuer, unless so decided by DBS HK.

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Asian Insights SparX Chow Tai Fook

Income Statement (HK$ m) Balance Sheet (HK$ m) FY Mar 2017A 2018A 2019F 2020F FY Mar 2017A 2018A 2019F 2020F Turnover 51,246 59,156 65,109 69,970 Net Fixed Assets 5,633 6,861 7,419 7,880 Cost of Goods Sold (36,283) (42,943) (47,264) (50,792) Invts in Assocs & JVs 20 62 0 0 Gross Profit 14,963 16,213 17,845 19,177 Other LT Assets 1,480 1,335 1,317 1,280 Other Opng (Exp)/Inc (10,584) (10,382) (11,320) (11,882) Cash & ST Invts 7,943 7,944 8,702 8,326 Operating Profit 4,378 5,832 6,525 7,295 Inventory 29,259 34,929 33,020 36,181 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 0 0 0 0 Associates & JV Inc 0 0 0 0 Other Current Assets 5,066 6,438 5,572 5,614 Net Interest (Exp)/Inc 0 0 0 0 Total Assets 49,402 57,570 56,030 59,281 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 ST Debt 5,693 8,359 6,475 6,958 Pre-tax Profit 4,378 5,832 6,525 7,295 Creditors 10,005 12,260 14,360 16,360 Tax (1,227) (1,629) (1,631) (1,751) Other Current Liab 90 101 101 101 Minority Interest (96) (108) (73) (83) LT Debt 600 2,100 0 0 Preference Dividend 0 0 0 0 Other LT Liabilities 512 653 653 653 Net Profit 3,055 4,095 4,820 5,461 Shareholder’s Equity 31,799 33,423 33,695 34,379 Net Profit before Except. 3,055 4,095 4,820 5,461 Minority Interests 703 674 748 831 EBITDA 5,116 6,589 7,592 8,442 Total Cap. & Liab. 49,402 57,570 56,030 59,281 Sales Gth (%) (9.4) 15.4 10.1 7.5 EBITDA Gth (%) 8.1 28.8 15.2 11.2 Non-Cash Wkg. Cap 24,230 29,007 24,132 25,334 Opg Profit Gth (%) 11.2 33.2 11.9 11.8 Net Cash/(Debt) 1,650 (2,515) 2,228 1,368 Net Profit Gth (%) 3.9 34.0 17.7 13.3 Effective Tax Rate (%) 28.0 27.9 25.0 24.0

Cash Flow Statement (HK$ m) Rates & Ratio FY Mar 2017A 2018A 2019F 2020F FY Mar 2017A 2018A 2019F 2020F Pre-Tax Profit 4,378 5,832 6,525 7,295 Gross Margins (%) 29.2 27.4 27.4 27.4 Dep. & Amort. 854 871 966 1,056 Opg Profit Margin (%) 8.5 9.9 10.0 10.4 Tax Paid (920) (1,015) 0 0 Net Profit Margin (%) 6.0 6.9 7.4 7.8 Assoc. & JV Inc/(loss) 80 0 0 0 ROAE (%) 9.2 12.6 14.4 16.0 (Pft)/ Loss on disposal of FAs 10 7 7 7 ROA (%) 5.8 7.7 8.5 9.5 ChgFAFAsiaries/Investments in Wkg.Cap. (-/+) 1,452 (3,026) 892 (2,719) ROCE (%) 9.9 13.0 14.3 16.4 Other Operating CF 397 182 160 183 Div Payout Ratio (%) 0.0 0.0 0.0 0.0 Net Operating CF 6,252 2,851 8,550 5,823 Net Interest Cover (x) NM NM NM NM Capital Exp.(net) (1,213) (1,611) (1,058) (1,058) Asset Turnover (x) 1.0 1.1 1.1 1.2 Other Invts.(net) 0 0 0 0 Debtors Turn (avg days) N/A N/A N/A N/A Invts in Assoc. & JV (20) (43) 0 0 Creditors Turn (avg days) 124.6 96.3 105.2 112.9 Div from Assoc & JV 0 0 0 0 Inventory Turn (avg days) 311.3 277.7 268.4 254.4 Other Investing CF 86 76 99 115 Current Ratio (x) 2.7 2.4 2.3 2.1 Net Investing CF (1,147) (1,577) (959) (943) Quick Ratio (x) 0.5 0.4 0.4 0.4 Div Paid (5,148) (4,260) (6,182) (6,604) Net Debt/Equity (X) CASH 0.1 CASH CASH Chg in Gross Debt 0 0 0 0 Capex to Debt (%) 19.3 15.4 16.3 15.2 Capital Issues 0 0 0 0 Z-Score (X) N/A N/A N/A N/A Other Financing CF (4,624) 2,507 (296) 1,704 N.Cash/(Debt)PS (HK$) 0.17 (0.25) 0.22 0.14 Net Financing CF (9,771) (1,753) (6,477) (4,900) Opg CFPS (HK$) 0.48 0.59 0.77 0.85 Currency Adjustments 0 0 0 0 Free CFPS (HK$) 0.56 0.20 0.77 0.50 Chg in Cash (4,667) (479) 1,114 (20)

Source: Company, DBS HK

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Asian Insights SparX Lifestyle International

Bloomberg: 1212 HK Equity | Reuters: 1212.HK Refer to important disclosures at the end of this report

A niche tourist play BUY Last Traded Price (6 Jul 2018):HK$16.70 (HSI : 28,316) • Robust 1H18 SSSG to fuel better operating leverage Price Target 12-mth: HK$18.72 (12.1% upside) Potential Catalyst: Rising tourist mobility & consumption; Kai Tak City • With the right product-mix to best capture PRC tourist Where we differ: Slightly faster SSSG estimates vs. consensus consumption, impending infrastructural improvement and rising Mainland visitor numbers should be beneficial Analyst Mavis HUI +852 2863 8879 [email protected] • Trading at c.13x 12-month rolling PE and 11% discount to our TP of HK$18.72, we maintain BUY Price Relative HK$ Relative Index Right locations, right products. Lifestyle currently operates 2 SOGO 26.3 205 Stores in HK. The company possesses strong retail expertise and long 24.3 185 22.3 relationship with key global brands, as well as strategic store 165 20.3 18.3 145 locations atop main subway stations to maximize shoppers’ traffic. 16.3 125 Given its sound exposure to Mainland tourist consumption that 14.3 105 12.3 85 represents 40%+ sales of its self-owned flagship store in Causeway 10.3 65 8.3 45 Bay (“CWB”), and 65%+ sales of its rented store in Tsim Sha Tsui Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 (“TST”), sustainable PRC tourist arrivals along with better transport Lifestyle International (LHS) Relative HSI (RHS) links with China should be favourable. Medium-term growth drivers Forecasts and Valuation will also include its new Kai Tak City in Kowloon East (by 2022). FY Dec (HK$ m) 2016A 2017A 2018F 2019F Turnover 4,672 4,899 5,594 6,095 Accelerated SSSG. On the back of improving tourist numbers, we EBITDA 2,430 2,892 2,740 3,040 anticipate Lifestyle to score a strong double-digit same-store sales Pre-tax Profit 1,886 3,411 2,380 2,612 Net Profit 1,571 2,875 1,970 2,167 growth (SSSG) for both its SOGO CWB Store (1H17: -1.5%) and Core Profit 1,369 1,361 1,772 1,950 SOGO TST Store (1H17: +17.7%) during 1H18. In terms of category EPS (HK$) 0.98 1.79 1.23 1.35 sales, cosmetics should register the strongest SSSG of 30-40%+, Core EPS (HK$) 0.85 0.85 1.11 1.22 EPS Gth (%) (15.5) 83.0 (31.5) 10.0 followed by selected luxury brands and jewellery plays. SSSG across Core EPS Gth (%) (25.8) (0.5) 30.2 10.0 menswear, footwear and household items could perform relatively Diluted EPS (HK$) 0.98 1.79 1.23 1.35 slower. Blended commission rate from concessionaires should also DPS (HK$) 0.63 0.63 0.49 0.54 BV Per Share (HK$) 1.15 2.52 2.92 3.69 edge down slightly given robust sales of luxury groups. Yet, overall PE (X) 17.0 9.3 13.6 12.3 1H18 should be promising and outlook stays encouraging. Core PE (X) 19.6 19.7 15.1 13.7 P/Cash Flow (X) 13.6 12.8 10.6 9.7 Good prospects. Better operating leverage should be unlocked in P/Free CF (X) (4.6) 9.9 14.6 13.0 both SOGO stores this year, particularly for its self-owned store in EV/EBITDA (X) 14.1 11.0 11.3 9.9 Net Div Yield (%) 3.8 3.8 2.9 3.2 CWB. In view of strengthening sales momentum, expanding margins P/Book Value (X) 14.5 6.6 5.7 4.5 and decent prospects from better Mainlanders’ mobility ahead to Net Debt/Equity (X) 2.8 1.3 0.9 0.6 potentially fuel tourist consumption in HK, Lifestyle sustains a good ROAE (%) 24.2 97.5 45.2 40.9 business outlook. Our target price of HK$18.72 is based on sum-of- Earnings Rev (%): Nil Nil the-parts valuation that adopts 4.5% cap rate on the concessionaire Consensus EPS (HK$) 1.17 1.25 income, 8x PE on retail operations, and an NAV discount of 40%. Other Broker Recs: B:9 S:0 H:0

Source of all data on this page: Company, DBS Bank (Hong Kong) At A Glance Limited (“DBS HK”), Thomson Reuters, HKEX Issued Capital (m shrs) 1,603 Mkt Cap (HK$m/US$m) 26,603 / 3,389 Major Shareholders (%) Lau (Luen Hung) 35.5 United Goal Resources Ltd. 33.7 Fidelity Management & Research Company 5.4 Free Float (%) 25.3 3m Avg. Daily Val. (US$m) 8.1 ICB Industry: Consumer Services / General Retailers

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Asian Insights SparX Lifestyle International

Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2016A 2017A 2018F 2019F FY Dec 2016A 2017A 2018F 2019F Turnover 4,672 4,899 5,594 6,095 Net Fixed Assets 5,649 5,690 5,675 6,109 Cost of Goods Sold (2,029) (2,112) (2,407) (2,607) Invts in Assocs & JVs 0 0 0 0 Gross Profit 2,643 2,786 3,188 3,488 Other LT Assets 5,262 4,991 4,991 4,991 Other Opng (Exp)/Inc (627) (725) (825) (871) Cash & ST Invts 9,961 10,738 12,015 13,886 Operating Profit 2,016 2,061 2,363 2,618 Inventory 35 38 51 63 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 194 175 200 218 Associates & JV Inc 0 0 0 0 Other Current Assets 16 0 0 0 Net Interest (Exp)/Inc (332) (163) (180) (223) Total Assets 21,117 21,632 22,931 25,267 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 202 1,513 197 217 ST Debt 7,307 2,602 2,602 2,602 Pre-tax Profit 1,886 3,411 2,380 2,612 Creditors 1,243 1,293 1,446 1,542 Tax (338) (537) (410) (445) Other Current Liab 309 199 209 220 Minority Interest 24 0 0 0 LT Debt 9,550 13,220 13,720 14,720 Preference Dividend 0 0 0 0 Other LT Liabilities 260 273 273 273 Net Profit 1,571 2,875 1,970 2,167 Shareholder’s Equity 1,850 4,044 4,681 5,910 Net Profit before Except. 1,369 1,361 1,772 1,950 Minority Interests 598 0 0 0 EBITDA 2,430 2,892 2,740 3,040 Total Cap. & Liab. 21,117 21,632 22,931 25,267 Sales Gth (%) (24.3) 4.9 14.2 9.0 EBITDA Gth (%) (6.7) 19.0 (5.3) 10.9 Non-Cash Wkg. Cap (1,307) (1,280) (1,405) (1,481) Opg Profit Gth (%) (14.4) 2.3 14.6 10.8 Net Cash/(Debt) (6,897) (5,083) (4,307) (3,436) Net Profit Gth (%) (17.9) 83.0 (31.5) 10.0 Effective Tax Rate (%) 17.9 15.7 17.2 17.0

Cash Flow Statement (HK$ m) Rates & Ratio FY Dec 2016A 2017A 2018F 2019F FY Dec 2016A 2017A 2018F 2019F Pre-Tax Profit 2,237 3,838 2,380 2,612 Gross Margins (%) 56.6 56.9 57.0 57.2 Dep. & Amort. 211 162 180 205 Opg Profit Margin (%) 43.1 42.1 42.2 42.9 Tax Paid (404) (329) (410) (445) Net Profit Margin (%) 33.6 58.7 35.2 35.6 Assoc. & JV Inc/(loss) (212) 0 0 0 ROAE (%) 24.2 97.5 45.2 40.9 (Pft)/ Loss on disposal of FAs 12 (842) 0 0 ROA (%) 6.3 13.4 8.8 9.0 ChgFAFAsiaries/Investments in Wkg.Cap. (-/+) (91) 82 115 65 ROCE (%) 7.3 8.7 9.4 9.7 Other Operating CF 215 (828) 263 322 Div Payout Ratio (%) 64.5 35.2 40.0 40.0 Net Operating CF 1,969 2,083 2,527 2,759 Net Interest Cover (x) 6.1 12.6 13.1 11.7 Capital Exp.(net) (7,834) 611 (700) (700) Asset Turnover (x) 0.2 0.2 0.3 0.3 Other Invts.(net) (1,838) (1,510) 0 0 Debtors Turn (avg days) 18.3 13.8 12.2 12.5 Invts in Assoc. & JV (2,063) 0 0 0 Creditors Turn (avg days) 368.9 237.4 224.5 227.1 Div from Assoc & JV 0 0 0 0 Inventory Turn (avg days) 11.4 6.7 7.2 8.7 Other Investing CF 4,653 1,243 0 0 Current Ratio (x) 1.2 2.7 2.9 3.2 Net Investing CF (7,081) 344 (700) (700) Quick Ratio (x) 1.1 2.7 2.9 3.2 Div Paid (1,013) (1,013) (788) (867) Net Debt/Equity (X) 2.8 1.3 0.9 0.6 Chg in Gross Debt 5,487 (1,120) 500 1,000 Capex to Debt (%) 46.5 N/A 4.3 4.0 Capital Issues 0 0 0 0 Z-Score (X) 2.4 3.0 3.0 2.9 Other Financing CF (486) (434) (263) (322) N.Cash/(Debt)PS (HK$) (4.30) (3.17) (2.69) (2.14) Net Financing CF 3,988 (2,566) (551) (189) Opg CFPS (HK$) 1.29 1.25 1.51 1.68 Currency Adjustments (25) 9 0 0 Free CFPS (HK$) (3.66) 1.68 1.14 1.28 Chg in Cash (1,149) (131) 1,277 1,870

Source: Company, DBS HK

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Asian Insights SparX Luk Fook Holdings

Bloomberg: 590 HK EQUITY | Reuters: 0590.HK Refer to important disclosures at the end of this report

BUY Accelerated SSSG Last Traded Price (6 Jul 2018):HK$31.65 (HSI : 28,316) • Latest SSSG in core HK/Macau markets ascended further to over Price Target 12-mth: HK$40.75 (28.8% upside) 20% in 1Q FY19, vs. 18% in 4Q FY18 and 9% in FY18 Potential Catalyst: Rising tourist mobility & consumption; online sales Where we differ: Slightly better estimates on SSSG & operating leverage • Good business outlook and better operating leverage also vs. consensus reinforce promising prospects Analyst • Trading at an undemanding c.11x 12-mth rolling PE, at >4% yield, Mavis HUI +852 2863 8879 [email protected] BUY

Price Relative Strengthening performance. Luk Fook has recently reported a HK$ Relative Index 13.8% y-o-y increase in revenue for FY18. Better operating leverage 220 in HK/Macau & Overseas, especially into 2H FY18 had lifted 36.5 200 segmental margins and helped boosting overall earnings growth by 180 31.5 44%. With a strengthening sales trend for FY19, especially given 160 26.5 140 impending infrastructural improvements (e.g. HK High-speed Rail)

21.5 120 and vibrant development of the Greater Bay Area of China, travelers’ 100 16.5 mobility should improve, hence creating better prospects for tourist 80 consumption in HK/Macau. 11.5 60 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Sustainable sales momentum. In 1Q FY19, Luk Fook’s same-store Luk Fook Holdings (LHS) Relative HSI (RHS) sales growth (SSSG) strengthened further to over 20% in HK/Macau, thanks to stronger contribution from Mainland visitors (FY18: 58% of Forecasts and Valuation FY Mar (HK$ m) 2017A 2018A 2019F 2020F HK/Macau sales) and supportive local demand. China is seeing a Turnover 12,807 14,578 16,751 18,822 mixed trend, with gem-set sales resuming growth while gold product EBITDA 1,366 1,771 2,060 2,325 sales remain quite soft; e-commerce performance stays robust though Pre-tax Profit 1,250 1,613 1,947 2,207 and should grow by at least 30% even on a higher base (FY18: up Net Profit 1,017 1,369 1,633 1,840 88.7% to reach 15.5% of China retail revenue). Overall, Luk Fook EPS (HK$) 1.73 2.33 2.78 3.13 targets at double-digit SSSG for HK/Macau and a single-digit SSSG for EPS Gth (%) 6.3 34.7 19.3 12.7 China in FY19. No less than 120 stores will also be added in China Diluted EPS (HK$) 1.73 2.33 2.78 3.13 DPS (HK$) 1.10 1.10 1.34 1.50 during FY19, predominantly licensed stores. Another 5 stores could BV Per Share (HK$) 15.11 17.09 17.99 19.62 be added in HK/Macau, plus 3-5 new openings in overseas markets PE (X) 18.3 13.6 11.4 10.1 (e.g. Malaysia, Philippines). P/Cash Flow (X) 25.8 16.7 15.3 17.9 Better profitability. Riding on robust SSSG to better dilute the P/Free CF (X) 29.7 18.1 17.0 20.6 overheads, key cost items had seen decent improvement. For EV/EBITDA (X) 12.6 9.7 8.6 7.6 instance, we saw a 0.5ppt decline in rental cost ratio to 5.7% of Net Div Yield (%) 3.5 3.5 4.2 4.8 P/Book Value (X) 2.1 1.9 1.8 1.6 sales, and 0.2ppt reduction in advertising & promotional expense Net Debt/Equity (X) CASH CASH CASH CASH ratio to 0.6% of sales during FY18. Looking ahead, better operating ROAE (%) 11.6 14.5 15.9 16.7 leverage given a strengthening SSSG, and normalizing wholesale gross margin that was affected in FY18, by some one-off price Earnings Rev (%): Nil Nil adjustments and an exceptionally high-base, should benefit Consensus EPS (HK$) 2.40 2.63 profitability and support earnings growth for FY19-20. Other Broker Recs: B:9 S:1 H:7 At A Glance Source of all data on this page: Company, DBS Bank (Hong Kong) Issued Capital (m shrs) 587 Limited (“DBS HK”), Thomson Reuters, HKEX Mkt Cap (HK$m/US$m) 18,993 / 2,420 Major Shareholders (%) Luk Fook (Control) Ltd. 39.9 Silchester International Investors, L.L.P. 11.1 Free Float (%) 49.1 3m Avg. Daily Val. (US$m) 4.6 ICB Industry: Consumer Services / General Retailers

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Asian Insights SparX Luk Fook Holdings

Income Statement (HK$ m) Balance Sheet (HK$ m) FY Mar 2017A 2018F 2019F 2020F FY Mar 2017A 2018A 2019F 2020F Turnover 12,807 14,578 16,751 18,822 Net Fixed Assets 812 821 848 877 Cost of Goods Sold (9,530) (10,837) (12,452) (13,987) Invts in Assocs & JVs 176 163 163 163 Gross Profit 3,277 3,741 4,299 4,835 Other LT Assets 260 353 353 353 Other Opng (Exp)/Inc (1,988) (2,069) (2,350) (2,633) Cash & ST Invts 1,862 2,098 1,644 1,797 Operating Profit 1,289 1,673 1,949 2,202 Inventory 6,973 7,992 9,012 9,931 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 541 725 833 935 Associates & JV Inc (54) (30) (24) (19) Other Current Assets 56 64 64 64 Net Interest (Exp)/Inc 15 23 22 24 Total Assets 10,679 12,215 12,917 14,121 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 0 (52) 0 0 ST Debt 437 726 816 921 Pre-tax Profit 1,250 1,613 1,947 2,207 Creditors 1,005 1,125 1,231 1,383 Tax (223) (243) (293) (344) Other Current Liab 152 174 174 174 Minority Interest (10) (1) (21) (23) LT Debt 0 0 0 0 Preference Dividend 0 0 0 0 Other LT Liabilities 105 109 115 115 Net Profit 1,017 1,369 1,633 1,840 Shareholder’s Equity 8,873 10,035 10,562 11,519 Net Profit before Except. 1,017 1,421 1,633 1,840 Minority Interests 107 45 19 8 EBITDA 1,366 1,771 2,060 2,325 Total Cap. & Liab. 10,679 12,215 12,917 14,121 Sales Gth (%) (8.7) 13.8 14.9 12.4 EBITDA Gth (%) 7.7 29.7 16.3 12.8 Non-Cash Wkg. Cap 6,413 7,481 8,504 9,374 Opg Profit Gth (%) 6.4 29.7 16.5 13.0 Net Cash/(Debt) 1,425 1,372 829 876 Net Profit Gth (%) 6.1 34.7 19.3 12.7 Effective Tax Rate (%) 17.8 15.1 15.1 15.6

Cash Flow Statement (HK$ m) Rates & Ratio FY Mar 2017A 2018A 2019F 2020F FY Mar 2017A 2018A 2019F 2020F Pre-Tax Profit 1,250 1,613 1,947 2,207 Gross Margins (%) 25.6 25.7 25.7 25.7 Dep. & Amort. 131 128 135 142 Opg Profit Margin (%) 10.1 11.5 11.6 11.7 Tax Paid (215) (243) (293) (344) Net Profit Margin (%) 7.9 9.4 9.7 9.8 Assoc. & JV Inc/(loss) 54 0 0 0 ROAE (%) 11.6 14.5 15.9 16.7 (Pft)/ Loss on disposal of FAs 2 0 0 0 ROA (%) 9.5 12.0 13.0 13.6 ChgFAFAsiaries in Wkg.Cap./Investments (-/+) (511) (337) (524) (915) ROCE (%) 11.1 13.9 14.8 15.4 Other Operating CF 9 (51) (48) (53) Div Payout Ratio (%) 63.5 47.1 48.0 48.0 Net Operating CF 720 1,110 1,217 1,038 Net Interest Cover (x) NM NM NM NM Capital Exp.(net) (95) (82) (122) (134) Asset Turnover (x) 1.2 1.3 1.3 1.4 Other Invts.(net) 0 0 0 0 Debtors Turn (avg days) 14.2 15.8 17.0 17.1 Invts in Assoc. & JV 0 0 0 0 Creditors Turn (avg days) 36.8 36.3 34.9 34.5 Div from Assoc & JV 1 1 1 1 Inventory Turn (avg days) 258.6 255.0 251.9 249.7 Other Investing CF (314) (102) (852) 29 Current Ratio (x) 5.9 5.4 5.2 5.1 Net Investing CF (407) (183) (973) (105) Quick Ratio (x) 1.5 1.4 1.1 1.1 Div Paid (646) (645) (784) (883) Net Debt/Equity (X) CASH CASH CASH CASH Chg in Gross Debt (477) 289 89 106 Capex to Debt (%) 21.7 11.3 15.0 14.6 Capital Issues 0 0 0 0 Z-Score (X) 10.3 10.3 10.4 9.8 Other Financing CF 323 (2) (2) (2) N.Cash/(Debt)PS (HK$) 2.43 2.34 1.41 1.49 Net Financing CF (799) (358) (697) (780) Opg CFPS (HK$) 2.10 2.47 2.97 3.33 Currency Adjustments (14) 0 0 0 Free CFPS (HK$) 1.07 1.75 1.86 1.54 Chg in Cash (500) 569 (454) 153

Source: Company, DBS HK

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Asian Insights SparX Sa Sa

Bloomberg: 178 HK EQUITY | Reuters: 0178.HK Refer to important disclosures at the end of this report

BUY Overall prospects improved Last Traded Price (6 Jul 2018):HK$4.53 (HSI : 28,316) • Robust SSSG of 26.9% in HK/Macau from Apr to mid-Jun 2018 Price Target 12-mth: HK$6.51 (43.7% upside) • Potential upsurge of PRC tourists via better transport links Potential Catalyst: Rising tourist mobility & consumption; e-commerce Where we differ: better operating leverage vs. consensus should continue to support sales volume into FY19-20 • Operating leverage to improve further on sound revenue Analyst Mavis HUI +852 2863 8879 [email protected] expansion. Maintain BUY Volume is the key. Sa Sa reported a 6% y-o-y growth in sales, and Price Relative c.53% increase in core earnings to HK$502m in its latest FY18 HK$ Relative Index results. Riding on an increasing number of Chinese visitors into its 213 6.8 193 core HK/Macau markets, especially given impending inauguration 173 5.8 153 of the high-speed rail, the company’s affordable ticket size 4.8 133 (c.HK$600) could more easily secure PRC tourists’ consumption 113 3.8 93 (FY18: 70%+ of HK/Macau sales). With a compelling HK/Macau 73 2.8 same-store sales growth (SSSG) of 26.9% during 1 Apr - 18 Jun 53 1.8 33 2018 (FY18: up 3.9%), and sound catalysts from infrastructural Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 improvement to attract more Mainland tourists, we stay confident Sa Sa (LHS) Relative HSI (RHS) on strong sales volume to sustain better operating leverage and Forecasts and Valuation margin enhancement into FY19-20. FY Mar (HK$ m) 2017A 2018A 2019F 2020F Turnover 7,746 8,018 9,023 9,811 Improving non-core divisions. In FY18, Malaysia/Singapore already EBITDA 498 647 921 1,089 turned around to make HK$4.7m profits. Both China and its e- Pre-tax Profit 405 561 796 954 Net Profit 327 465 660 792 commerce division also saw narrowed losses. The company also EPS (HK$) 0.11 0.15 0.22 0.26 stays positive in e-commerce, targeting at sound divisional growth EPS Gth (%) (16.9) 38.5 40.6 19.9 of 20%+ for FY19 and better operating efficiency from impending Diluted EPS (HK$) 0.11 0.15 0.22 0.26 DPS (HK$) 0.17 0.17 0.22 0.26 relocation of its PRC logistics center from Zhengzhou to Hangzhou. BV Per Share (HK$) 0.74 0.82 0.82 0.82 Strong operating leverage. Sa Sa has secured better operating PE (X) 40.6 29.3 20.8 17.4 P/Cash Flow (X) 37.2 45.3 28.2 20.6 leverage as SSSG continues to ramp up. The latest example points P/Free CF (X) 48.2 101.1 44.7 24.2 to its much improved 2H FY18 SSSG of +9.1% for HK/Macau (1H EV/EBITDA (X) 24.7 19.0 13.6 11.6 FY18: -2.1%), hence better operating cost ratios (in terms of sales) Net Div Yield (%) 3.7 3.9 4.8 5.8 P/Book Value (X) 6.1 5.5 5.5 5.5 that included rentals of 11.1% (1H FY18: 14%), staff expenses of Net Debt/Equity (X) CASH CASH CASH CASH 11.9% (1HFY18: 13.4%), and advertising & promotional costs of ROAE (%) 14.5 19.8 26.6 31.9 1.1% (1H FY18: 1.4%). Management’s key initiatives ahead will mainly focus on sales enhancement to more effectively capture Earnings Rev (%): Nil Nil Consensus EPS (HK$) 0.21 0.25 operating leverage. Its store addition in HK/Macau (add 5-6) and Other Broker Recs: B:10 S:0 H:3 China (add 8) in FY19, inclusive of 4 new stores in the Greater Bay

Source of all data on this page: Company, DBS Bank (Hong Kong) Area of China (e.g. Dongguan, Zhuhai, Jiangmen) should stengthen Limited (“DBS HK”), Thomson Reuters, HKEX operating scale further and open up new medium-term opportunities.

At A Glance Issued Capital (m shrs) 3,040 Mkt Cap (HK$m/US$m) 14,592 / 1,859 Major Shareholders (%) Sunrise Height Incorporated 48.8 Green Ravine Limited 14.2 Free Float (%) 37.0 3m Avg. Daily Val. (US$m) 6.0 ICB Industry: Consumer Services / General Retailers

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Asian Insights SparX Sa Sa

Income Statement (HK$ m) Balance Sheet (HK$ m) FY Mar 2017A 2018A 2019F 2020F FY Mar 2017A 2018A 2019F 2020F Turnover 7,746 8,018 9,023 9,811 Net Fixed Assets 284 340 373 326 Cost of Goods Sold (4,517) (4,644) (5,271) (5,741) Invts in Assocs & JVs 0 0 0 0 Gross Profit 3,229 3,374 3,752 4,070 Other LT Assets 164 157 172 189 Other Opng (Exp)/Inc (2,834) (2,825) (2,968) (3,129) Cash & ST Invts 969 1,365 1,221 1,184 Operating Profit 395 549 783 941 Inventory 1,222 1,337 1,518 1,653 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 67 145 43 46 Associates & JV Inc 0 0 0 0 Other Current Assets 223 232 383 416 Net Interest (Exp)/Inc 10 12 12 13 Total Assets 2,929 3,577 3,709 3,815 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 ST Debt 0 0 0 0 Pre-tax Profit 405 561 796 954 Creditors 606 977 1,099 1,195 Tax (79) (95) (135) (162) Other Current Liab 45 61 64 68 Minority Interest 0 0 0 0 LT Debt 0 0 0 0 Preference Dividend 0 0 0 0 Other LT Liabilities 59 57 62 69 Net Profit 327 465 660 792 Shareholder’s Equity 2,219 2,483 2,483 2,483 Net Profit before Except. 327 465 660 792 Minority Interests 0 0 0 0 EBITDA 498 647 921 1,089 Total Cap. & Liab. 2,929 3,577 3,709 3,815 Sales Gth (%) (1.3) 3.5 12.5 8.7 EBITDA Gth (%) (14.7) 29.8 42.5 18.2 Non-Cash Wkg. Cap 861 678 779 852 Opg Profit Gth (%) (14.3) 38.8 42.8 20.1 Net Cash/(Debt) 969 1,365 1,221 1,184 Net Profit Gth (%) (14.8) 42.4 42.0 19.9 Effective Tax Rate (%) 19.4 17.0 17.0 17.0

Cash Flow Statement (HK$ m) Rates & Ratio FY Mar 2017A 2018A 2019F 2020F FY Mar 2017A 2018A 2019F 2020F Pre-Tax Profit 405 561 796 954 Gross Margins (%) 41.7 42.1 41.6 41.5 Dep. & Amort. 103 98 138 148 Opg Profit Margin (%) 5.1 6.8 8.7 9.6 Tax Paid (4) (57) (81) (97) Net Profit Margin (%) 4.2 5.8 7.3 8.1 Assoc. & JV Inc/(loss) 0 0 0 0 ROAE (%) 14.5 19.8 26.6 31.9 (Pft)/ Loss on disposal of FAs 12 0 0 0 ROA (%) 10.5 13.7 17.6 20.5 ChgFAFAsiaries/Investments in Wkg.Cap. (-/+) (80) (203) (228) (173) ROCE (%) 13.4 18.5 25.2 30.2 Other Operating CF (80) (97) (137) (163) Div Payout Ratio (%) 154.9 114.2 100.0 100.0 Net Operating CF 357 301 488 669 Net Interest Cover (x) NM NM NM NM Capital Exp.(net) (82) (166) (180) (100) Asset Turnover (x) 2.6 2.2 2.4 2.6 Other Invts.(net) 0 0 0 0 Debtors Turn (avg days) 3.2 6.6 1.7 1.7 Invts in Assoc. & JV 0 0 0 0 Creditors Turn (avg days) 49.1 63.5 73.8 74.9 Div from Assoc & JV 0 0 0 0 Inventory Turn (avg days) 96.1 102.7 101.5 103.5 Other Investing CF 7 12 12 13 Current Ratio (x) 3.8 3.0 2.7 2.6 Net Investing CF (75) (154) (168) (87) Quick Ratio (x) 1.6 1.5 1.1 1.0 Div Paid (381) (531) (660) (792) Net Debt/Equity (X) CASH CASH CASH CASH Chg in Gross Debt 0 0 0 0 Capex to Debt (%) N/A N/A N/A N/A Capital Issues (5) 0 0 0 Z-Score (X) 17.7 17.7 17.4 16.4 Other Financing CF 0 781 196 174 N.Cash/(Debt)PS (HK$) (0.33) (0.45) (0.40) (0.39) Net Financing CF (386) 250 (465) (618) Opg CFPS (HK$) 0.15 0.17 0.24 0.28 Currency Adjustments (6) 0 0 0 Free CFPS (HK$) 0.09 0.04 0.10 0.19 Chg in Cash (110) 397 (145) (36)

Source: Company, DBS HK

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DBS HK recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

Completed Date: 17 Jul 2018 09:29:38 (HKT) Dissemination Date: 17 Jul 2018 19:24:09 (HKT)

Sources for all charts and tables are DBS HK unless otherwise specified.

GENERAL DISCLOSURE/DISCLAIMER

This report is prepared by DBS Bank (Hong Kong) Limited (“DBS HK”). This report is solely intended for the clients of DBS Bank Ltd., DBS HK, DBS Vickers (Hong Kong) Limited (“DBSV HK”), and DBS Vickers Securities (Singapore) Pte Ltd. (“DBSVS”), its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS HK.

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., DBS HK, DBSV HK, DBSVS, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.

This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.

The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.

DBS Vickers Securities (USA) Inc (“DBSVUSA”), a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.

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ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.

COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS HK, DBSVS or their subsidiaries and/or other affiliates have proprietary positions in Langham Hospitality Investment Limited (1270 HK), Fortune Real Estate Investment Trust (778 HK), Sands China Limited (1928 HK) and New World Development Company Limited (17 HK) recommended in this report as of 13 Jul 2018.

2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

3. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates have a net long position exceeding 0.5% of the total issued share capital in Langham Hospitality Investment Limited (1270 HK) and Fortune Real Estate Investment Trust (778 HK) recommended in this report as of 13 Jul 2018.

4. DBS Bank Ltd, DBS HK, DBSVS, DBS Vickers Securities (USA) Inc (“DBSVUSA”), or their subsidiaries and/or other affiliates beneficially own a total of 1% of the issuer's market capitalization of Langham Hospitality Investment Limited (1270 HK) and Fortune Real Estate Investment Trust (778 HK) as of 13 Jul 2018.

5. Compensation for investment banking services:

DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from Far East Consortium International Limited (35 HK), Wharf REIC (1997 HK), Regal Hotels International Holdings Limited (78 HK) and Csi Properties Limited (497 HK) as of 30 Jun 2018.

6. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for Far East Consortium International Limited (35 HK), Wharf REIC (1997 HK) and Csi Properties Limited (497 HK) in the past 12 months, as of 30 Jun 2018.

DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

7. Disclosure of previous investment recommendation produced: DBS Bank Ltd, DBSVS, DBS HK, their subsidiaries and/or other affiliates of DBSVUSA may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA in the preceding 12 months.

1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.

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RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia This report is being distributed in Australia by DBS Bank Ltd, DBSVS or DBSV HK. DBS Bank Ltd holds Australian Financial Services Licence no. 475946. DBSVS and DBSV HK are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS Bank Ltd and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, and DBSV HK is regulated by the Hong Kong Securities and Futures Commission under the laws of Hong Kong, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report is being distributed in Hong Kong by DBS Bank Ltd, DBS Bank (Hong Kong) Limited and DBS Vickers (Hong Kong) Limited, all of which are registered with or licensed by the Hong Kong Securities and Futures Commission to carry out the regulated activity of advising on securities.

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia. Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report. Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. United This report is produced by DBS HK which is regulated by the Hong Kong Monetary Authority

Kingdom This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd (“DBSVUK”). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom.

In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication. Dubai This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, International Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Financial Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for Centre professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

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United Arab This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined Emirates in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent. United States This report was prepared by DBS HK. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate. Other In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, jurisdictions professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. DBS Bank (Hong Kong) Limited 18th Floor Man Yee building, 68 Central, Central, Hong Kong Tel: (852) 2820-4888, Fax: (852) 2521-1812

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DBS Regional Research Offices

HONG KONG MALAYSIA SINGAPORE DBS Bank (Hong Kong) Ltd AllianceDBS Research Sdn Bhd DBS Bank Ltd Contact: Carol Wu Contact: Wong Ming Tek (128540 U) Contact: Janice Chua 18th Floor Man Yee Building 19th Floor, Menara Multi-Purpose, 12 Marina Boulevard, 68 Des Voeux Road Central Capital Square, Marina Bay Financial Centre Tower 3 Central, Hong Kong 8 Jalan Munshi Abdullah 50100 Singapore 018982 Tel: 852 2820 4888 Kuala Lumpur, Malaysia. Tel: 65 6878 8888 Fax: 852 2521 1812 Tel.: 603 2604 3333 Fax: 65 65353 418 e-mail: [email protected] Fax: 603 2604 3921 e-mail: [email protected] e-mail: [email protected] Company Regn. No. 196800306E

INDONESIA THAILAND PT DBS Vickers Sekuritas (Indonesia) DBS Vickers Securities (Thailand) Co Ltd Contact: Maynard Priajaya Arif Contact: Chanpen Sirithanarattanakul DBS Bank Tower 989 Siam Piwat Tower Building, Ciputra World 1, 32/F 9th, 14th-15th Floor Jl. Prof. Dr. Satrio Kav. 3-5 Rama 1 Road, Pathumwan, Jakarta 12940, Indonesia Bangkok Thailand 10330 Tel: 62 21 3003 4900 Tel. 66 2 857 7831 Fax: 6221 3003 4943 Fax: 66 2 658 1269 e-mail: [email protected] e-mail: [email protected] Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand

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